UT/2023/000009 - [2024] UKUT 00162 (TCC)

Over the course of the three-day hearing which took place before it, the FTT received evidence from Spectrum’s Chief Executive, Chief Pharmacist and Operational Manager for Health and Justice Services, and its Director of Finance, accepting all of those witnesses’ evidence of fact. It also received a significant volume of documentary evidence. None of the FTT’s underlying findings of fact is in dispute and in this section we aim to outline enough of the FTT decision to enable an understanding of the grounds Spectrum raises before us.

The FTT explained Spectrum was a community interest company and that NHSE was an independent body responsible for overseeing and commissioning healthcare including in prisons by entering into contracts with providers such as Spectrum (FTT [8]-[10] and [13] to [15]). The FTT then described (at FTT [16]) how Spectrum:

As regards NHSE, the FTT explained at FTT [17] how:

The FTT went on to make findings regarding the procurement and bidding process, detailing the invitations to tender, service specifications, including extracts relating to particular prisons. The specification included reference to medical services being “delivered as part of an Integrated Primary Care Service…” (FTT [27]) and to the provider ensuring “…that prisoners receive high level primary care services by providing an Integrated Care Service that is equivalent to that provided to the local community within the constraints of the environment.” The FTT set out details of the contract Spectrum entered into with NHSE in relation to another particular prison describing: the headings of the various services to be provided and how each heading was linked to detailed specifications (FTT [29] [30]); payments to be made (a single amount in respect of the expected annual contract value for providing all the services commissioned under the contract) (FTT [32]) and FTT [46]); and sub-contracting of certain services (FTT [33] and [34]). It described the provision of services such as nursing, doctor surgeries and pharmacy and sexual health services noting that the services provided in the different prisons were essentially the same (FTT [37] to [45]).

The FTT identified the issues for it to determine as being whether Spectrum made a single composite supply or multiple separate supplies and the VAT status of such composite supply or multiple separate supplies.

On the single vs. multiple supply issue, the FTT examined the case-law, including CPP and Levob. It noted that in accordance with that case-law, a number of points had to be considered from the perspective of a typical consumer (in particular the indivisibility and indispensability of the services). It rejected, however, Spectrum’s argument that the prisoners were the relevant typical consumers. It noted that, in line with various Supreme Court authorities (Secret Hotels2 Ltd v HMRC [2014] UKSC 16, WHA Ltd v HMRC [2013] UKSC 24, HMRC v Airtours Holidays Transport Ltd [2016] UKSC 21), the identification of who made and received a supply involved a two-stage process: first, looking at the contractual position and, second, considering whether that was consistent with economic and commercial reality. Applying that approach, it considered NHSE was the recipient of the supplies and therefore the consumer whose perspective was relevant.

Applying those principles, the FTT concluded that NHSE received from Spectrum under each contract a single composite supply of “primary healthcare or health and social care in the specified prison or prisons”. It considered “it would be artificial to split that supply into separate supplies of the individual elements that comprise the integrated healthcare or health and social care service.”

The FTT then proceeded to consider how that single supply should be classified and treated for VAT purposes. At FTT [70] it noted that “…both parties accept that if Spectrum makes a single composite supply then that supply is exempt as a supply of medical care”. The disagreement was over whether the supply was exempt under exemption b) (HMRC’s view) or under exemption c) (Spectrum’s view). The FTT rejected HMRC’s case, because Spectrum was not a duly recognised establishment similar to a hospital or centre for medical treatment or diagnosis. However, it also rejected Spectrum’s case based on EC v UK that exemption c) did not include drugs or contraceptives which were physically and economically dissociable and that per Klinikum the drugs need to be on a “therapeutic continuum”. The FTT held that the CJEU in EC v UK did not (as Spectrum had argued it did) decide that supplies of drugs/ goods other than minor ones strictly necessary for and not physically and economically dissociable could never be elements in single supply. It explained that here, in contrast to EC v UK and Klinikum, there was a single composite supply. The FTT accordingly concluded that no part of the supply was to be taxed differently and that there was accordingly no separate taxable supply of drugs or contraceptives.

We summarise the further detail of the FTT’s reasoning as necessary when discussing the relevant ground of appeal.