UT/2023/000021 - [2024] UKUT 00334 (TCC)

The other legal point of contention concerns the nature of any comparison between the taxpayer’s service provision and how the services are usually carried out. It is not in dispute that this can be a relevant factor (as noted in Wakefield (at [75]) and applied to the facts there (at [85]), the Court of Appeal observing that the viability of the “market in the provision of further and higher education” was “underpinned by a combination of grant aid and fees” and that there was no reason to suppose that the taxpayer college in that case was anything other than a “typical participant in that market”). The particular issue concerns whether the appropriate comparison is with a profit seeking operator acting as an entrepreneur.

In support of such a contention, Mr Edwards’ submissions relied heavily on the case of Gmina O (Case C-612/21)and, in particular, the reasoning in the Advocate General’s opinion. The facts concerned a municipal authority scheme under which it arranged for contractors to install renewable energy in the houses of individual residents, with the residents making a contribution of 25%, the remaining 75% being funded by another higher level authority (the provincial authority).

In her discussion of whether the service could be classified as economic activity, the Advocate General noted (at [50]) “the question of whether the amount of compensation was determined on the basis of criteria which ensured that it was sufficient to cover the operating costs of the provider of the service may be a relevant factor” and “the Court has denied activity specifically on the grounds that the contributions paid by the recipients of the service concerned covered only a small part of the operating costs incurred by the provider” (footnoting cases including Commission v Finland and Borsele). At [52], she pointed to various “noticeable differences from the activity of a typical taxpayer with a comparable job (here, “profession of solar energy system installer”), including (at [53]) that the municipal authority’s organisational costs were not added, with a profit margin, to the price of the service. Regarding the 75% contribution, the Advocate General noted (at [55]) the higher level provincial authority’s decision as to whether to make that contribution was only made after the installation work had been carried out. There thus remained “uncertainty atypical for a “normal” taxable person, over a fee that at most covers the costs. (i.e. uncertainty over whether the provincial authority would decide to provide its 75% contribution):

“…In this respect, the Municipality is not developing an entrepreneurial initiative nor does it have any chance to make a profit… As a result, it only bears the risk of loss. No typical taxable person would run his or her business in such a way that he organises something for a customer, but only bears the risk of loss and does not have any chance of making a profit, even in the very long term.

In addition, the reason behind the Municipality’s actions does not relate to economics. It is not about generating further revenue or maximising existing profits or about achieving surpluses of any kind. Instead, reasons based on general interest (environmental protection and energy security), which benefit everyone or individuals, are the primary considerations. The typical taxable person acts differently.”

The CJEU agreed that the activity was not economic activity for Article 9 purposes, noting (at [35]) that “all the circumstances in which [the activity] is supplied have to be examined … by making a case-by-case assessment, referring to the typical conduct of an active entrepreneur in the field concerned, here, an RES installer”. The reasoning of the CJEU contained substantially similar points. The court noted that the payments received remained “structurally lower than the total costs incurred”, contrasting an RES installer “which would have endeavoured, by setting its prices, to absorb its costs and to make a profit” and also (at [39]) that the timing uncertainty of the 75% contribution meant it did not appear “economically viable” for an RES installer to only seek a 25% contribution.

Mr Edwards’ submission was that the Trust was motivated by public interest considerations of diagnosing and treating illness for the long term good; they were not those of an “active entrepreneur” looking for a return. Mr Sands’ evidence explained:

“the services are not profit led and the Trust strives to maintain the balance between providing free NHS care at the point of use to patients and meeting its operating costs. The promotion and protection of public health is a principle purpose of the Trust for the health service. The Trust has a financial duty to breakeven each year.”

Moreover, Mr Edwards highlighted that the typical operators in the “market”, such as it was, were public sector NHS bodies like the Trust. In addition, he pointed to various clauses in the contracts with the local authorities which meant that they were unattractive to private operators seeking a return. For instance, there were clauses on continuous improvement, some anticipating that payments would decrease over time with the efficiency targets specified, and extensive equality and diversity obligations and reference to detailed health guidance. Mr Edwards suggested that public sector NHS bodies with existing resources would be far better equipped to comply with these and that they would be unattractive to private operators. Similarly, he argued that the dispute resolution clauses in the contracts were not of the type one would expect to see in a usual commercial contract.

Mr Sands’ evidence explained that, although the relevant services were tendered openly:

“…the strict parameters around the national specification, quality standards, breadth of the service tendered in an integrated model, and the tight financial constraint favour[ed] large bodies with historic asset base and experience and economy of scale mean[t] NHS providers have remained predominant.”

His evidence also stated that: “[h]igh set up costs, addressing TUPE liabilities and low profit margins with tighter constraint in local authority funding could be prohibiting factors for bodies outside NHS”. Mr Sands’ evidence went on to note the predominance of NHS bodies amongst the service providers. However he acknowledged that there were some instances “where non-nhs bodies [were] commissioned to deliver services inhouse or private (Virgin Care) and not-for profits organisations”. In respect of sexual health services, he confirms the presence of Virgin in the North East and Cheshire East and West and CICs (Community Interest Companies) such as Spectrum in Essex and Southend.

In agreement with Mr Mantle, however, we accept that the central point underpinning the above arguments, the suggested contrast with a profit seeking entrepreneur, is wide of the mark, not least given the CJEU’s latest exposition of principle in the Latvian Information Rights case.

That case concerned an association not permitted to make a profit by national law and co-financed by public subsidies which arranged projects and paid for third party companies to supply training services. The association received payments from the training recipients which it treated as consideration for taxable supplies and, in respect of which, it deducted input tax on the third party company invoices. The deduction was denied by the tax authority, including for the association’s lack of profit-making objective and the expectation that no profits would be made.

The CJEU concluded that the association’s status as non-profit making did not preclude it from being regarded as a taxable person carrying out an economic activity. Referring to the case-by-case assessment by reference to “the typical conduct of an active entrepreneur in the field concerned” indicated in Gmina O (and Gmina L – a similar case concerning a municipality which commissioned third party companies to carry out asbestos removal for residents), the CJEU explained:

“47 In that regard, it is true that the fact that, in fixing the cost of the supply of training services which it invoices to the recipients of those services, the Association seeks solely to cover its operating costs in order to achieve financial equilibrium appears not to correspond to the typical conduct of any entrepreneur, which is to strive for profitability.

48 However, that analysis does not correspond to the wording of Article 9(1) of Directive 2006/112 and is also not supported by the facts set out in the order for reference.

49 First of all, it follows from the wording of that provision that ‘taxable person’ means any person who, independently, carries out any economic activity, whatever the purpose or results of that activity. It follows that the Association’s aim of simply balancing its accounts is not sufficient to rule out the possibility that it is carrying out an economic activity. For the same reason, an undertaking which seek to make a profit but the activity of which proves to be loss-making on a long-term basis, for example due to underperformance, would nevertheless remain a taxable person if an analysis of all the circumstances in which that activity is carried out, referred to in paragraph 46 of the present judgment, leads to that activity being regarded as economic in nature.”

This reasoning also reflects that of Advocate General Kokott in the case (the same Advocate General who had given the opinion in both Gmina O referred to above and in Gmina L). From this, it is clear that the fact the Trust does not have a purpose of making profits and therefore might not carry out the activity in the same way as a profit seeking entrepreneur does not mean that it is not carrying out an economic activity.

In any event, none of the features relied upon by the Trust would appear to prevent a private operator providing the relevant services, at least on a not for profit basis. To the extent there were “strict parameters around the national specification, quality standards”, that appears simply to reflect that the healthcare market is, for good reason, highly regulated. The evidence that there are in fact private operators in some regions shows that it is possible for such private operators to form part of the market. Nor were we persuaded that certain aspects relied on, such as the type of dispute resolution provision, advanced the analysis. Under the sexual health contract dispute resolution clause, where the commissioning body was, as here, a local authority, the mediation contemplated was to be arranged by CEDR. That remained the case irrespective of whether the provider was an NHS foundation trust or a private body. (The provision of an NHS body nominated mediator only applied where both the commissioner and provider were NHS bodies.). Nor was there any evidence that private operators would have any greater difficulty complying with the other matters relied on such as the extensive equality and diversity requirements.

Mr Edwards argued that the private operator presence is so negligible that there is, in effect, no market. However, taking the position presented by Mr Sands in his evidence, and even ignoring those private operators which are known to engage in this area, we would not see any difficulty with services put out for tender by local authorities and NHS bodies, either local to the area or out of area, bidding to carry them out in return for income, themselves being a market, albeit one which operates within the broader framework of the public health system. The fact the competitors are public bodies does not make it any less of a market or mean that those participating in it could not be capable of carrying out economic activity for VAT purposes. Mr Edwards observed that this is not the type of case in which a public body is “delving into pre-existing market to supply services as part of public service activities”. We understand this to mean that is not a case where a public body is doing something outside its core function that private operators readily provide, such as car parking or cleaning services. However that does not prevent the provision of the relevant services here to local authorities being viewed as a market in its own right. In a similar vein, and for similar reasons as we explained under Issue 1, it is nothing to the point, that the Trust treats the income as “health income” rather than “other” (see [51] above).

As to the Trust’s argument regarding the extent to which the income received covers its operating costs of the service provision, and the extent to which it provides these at a loss, it is difficult to gain any meaningful picture in light of the lack of specific evidence. As HMRC highlighted, no figures for operating costs have been provided for any years in the period of claim. Mr Sands’ evidence states that:

“Having looked at the service line reporting information for children’s services 0-19 and Sexual Health services, I can see that there is a deficit in each year the Trust has provided these services with the exception being 19/20 (the Trust did not collect the information in 20/21 in a relevant format as the work was stood down for Covid; and no deficit in 19/20 is likely to be an implication of Covid though I would need to undertake further research to confirm that).

The overall picture is, however, very clear: both these services have made a loss in 3 of the relevant 4 years, which is consistent with the Trust’s position that it provides these services as key core services which have to be subsidised from other Trust – that is public, NHS – funds.”

However, no figures regarding the amount of deficit in the years of claim are provided and we were not taken to any corresponding evidence for IPC. As Mr Mantle points out, such evidence as there is shows that it was possible in one year to make a surplus. It was also not explained how the Covid pandemic would account for a surplus in health visiting services and sexual health services for the period 19/20 given that those services would presumably have continued to be provided until the wider impacts of the pandemic were felt towards the end of that period in March 2020. Mr Sands’ evidence also mentioned that:

“Due to the reducing absolute and real term level of funding through the public health grant, and the core nature of these services to the NHS and our statutory duties, these services are currently being provided at a loss on a fully cost absorbed basis. For 2022/23, the children’s services across the Trust ended the financial year with a deficit of £361,000, against a deficit plan of £439,000. For 2022/23, the sexual health services across the Trust outturn with a deficit of £577,000, against a deficit plan of £736,000. These deficits were funded through the Trust’s overall financial position which reported a small surplus.”

Again, no information is provided regarding the IPC figures but as regards health visiting and sexual health, taking account of the large scale of the funding amounts (several millions of pounds per year for health visiting, £1.4 million for sexual health), it does not appear to us that the local authority payments were income that was so insignificant as to call into question the Trust’s service provision being “for the purpose of obtaining income”. That remained so even taking account the downward trend in funding Mr Sands referred to.

Referring to Mr Sands’ evidence regarding the need to continue provision despite funding cuts, Mr Edwards submitted that it was significant that unlike a private operator, the Trust could not simply “hand back” the contract if the “economics” did not work but would have to continue to provide the services as part of its statutory public health care responsibilities. We are not persuaded that this argument is correct:

Returning to the question of whether the purpose of the supply to the local authorities is obtaining income on a continuing basis, HMRC draws attention to the long duration of the contracts and the large absolute payments in return for carrying out the activity. We agree both features in this case point towards the Trust carrying out the services in order to obtain income from the local authority and to the economic activity requirement in Article 9 PVD being satisfied. Regarding whether the payments cover costs, as discussed, it is no impediment to finding economic activity that they do not. But in any case, as Mr Mantle points out, such evidence as there is shows that the income derived from the contracts with the local authorities is not insignificant. There is nothing to indicate the Trust would provide these services without obtaining the payments it does.

In addition, as to the wider circumstances, the fact that the Trust has gone to the not insignificant trouble and expense, in competition with other market participants, of putting a tender together to bid for such service provision in return for obtaining income not only in its own area but also, in certain cases, outside is also consistent with the presence of the requisite purpose of obtaining income. Together, all of these factors suggest to us that the relevant supplies are economic activity for the purposes of Article 9 PVD.

In terms of comparison with the facts of other decided cases, in line with the way the case was argued before us, we do not consider a detailed analysis is called for. Both parties rightly acknowledged that the question of economic activity was fact sensitive. They also both note that VAT case-law recognises that a small change in the facts can change the analysis. If, however, we were to test some of the facts here against cases where no economic activity was found, it is clear there is some distance between them. So for instance, in Commission v Finland and Borsele,the income in question was viewed as small and in Gmina O there was a lack of permanence and certainty as regards the reimbursement. Neither applies here in the context of the monthly contractual payments operating over multiple years.

Finally, in oral submission, Mr Edwards queried whether a public body reliant on public funds could be said to be a “person who, independently, carries out” (emphasis added) the economic activity, as required by the terms of Article 9 PVD. That was not a point referred to in the claim or skeleton argument but, in any case, we reject it. As Mr Mantle explained, the requirement to carry out the activity “independently” speaks to those situations where, for example, employees of a company are not regarded as independent from a company. On the facts here, the Trust is clearly acting as an independent body.

For these reasons, in our judgment each of the relevant supplies by the Trust to the local authority was economic activity. The Trust’s case on Issue 2 therefore fails.