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

A key feature relied on by the Trust is that provision of the relevant services is a matter of statutory duty.

Mr Sands’ evidencerefers (at [13]) to sexual health and health visiting services being statutory services, going on to explain:

“These services “cannot not be provided, or go out of business”. They are services which must be provided. If these services were running at a significant loss, there would be negotiations with commissioners, but NHS providers would ensure continuity of provision while funding was negotiated.”

The question of what statutory duties there are and where those duties fall is, of course, a matter of law. We have set out above the 2013 Regulations (see [18]) which impose specific duties in respect of health visiting, sexual health and IPC on local authorities. In respect of the Trust, there was some dispute about the interpretation of s43 of the 2006 Act (set out at [20] above). Mr Edwards sought to argue that it was not realistic to read the reference to “may” as meaning that the Trust had a discretion not to exercise the powers identified there. NHS foundation trusts were a central part of the country’s public health architecture and key to the delivery of the Secretary of State’s duty to provide a comprehensive health service. If s43 was not interpreted as a statutory duty, the NHS foundation trust would have no raison d’être.

We found this argument unavailing: the legislative scheme imposes on local authorities specific duties in respect of the provision of the specific health services with which this case is concerned. The fact that bodies such as the Trust are themselves empowered to carry out those services by dint of their powers to provide services more broadly to prevent, diagnose and treat illness or to protect and promote public health does not mean that they are subject to the same duties. To the contrary, the straightforward interpretation of the words of s43 (and the use of “may”) is that the Trust is not so subject.

However, as HMRC point out, even if that analysis is wrong, and the Trust were under such a duty, that would still not preclude the provision of the relevant service to the local authority being “for consideration”. The relevance of such provision being made under a public duty was considered in Lajvér Meliorációs Nonprofit Kft (Case C-263/15). The case concerned not for profit companies which operated works including a water disposal system on agricultural land. The operations included the maintenance of public roads to ensure water flowed freely, such maintenance being an obligation imposed by law. The services were funded publicly but also by an operating fee charged to landowners. Issues arose to whether such payment was “for consideration” and the activity “economic activity”. The court at [41] noted that the road maintenance obligation had:

“…no bearing on the assessment as to whether the activity at issue in the main proceedings is effected ‘for consideration’, such a fact not being liable to call into question the classification of such an activity as a ‘supply of services’ or the direct link between the service provided and the consideration given for it.”

It explained at [42]:

“It has been held that the fact that the activity in question consists in the performance of duties conferred and regulated by law in the public interest is irrelevant for the purposes of determining whether that activity can be classified as a supply of services effected for consideration…”

The Trust also argues the significance of the funding by the local authorities for the services performed by the Trust being from public money. However, as HMRC point out, the case-law does not appear to attach the same significance to this aspect either. Earlier at [38] of Lajver,the CJEU explained that the concept of “economic activity” was :

“objective in nature and applies not only without regard to the purpose or results of the transactions concerned but also without regard to the method of financing chosen by the operator concerned, which also holds true in relation to public subsidies”.

There is no reason to suppose that the public nature of the means of financing the payment to the Trust for the relevant services (which did not appear to us be in dispute) would preclude the payment being “for consideration” either. As noted in Office des Produits Wallons (Case C-184/00) (as referred to by the Upper Tribunal in Colchester Institute v HMRC [2020] UKUT 368 (TCC)) consideration (in that case, third party consideration) could take the form of a subsidy paid from public funds so long as the subsidy bore a direct link with the services in issue. The focus thus remains on the requisite relationship between the payment and the services.

Equally, as set out in [38] of Lajver above, there is no reason why the result of the transactions (here that members of the public receive free health services) should bear on the question of whether there is the requisite legal relationship between the payment the local authority makes on the one hand and the services the Trust provides on the other. We thus reject the Trust’s argument that it was relevant that the “true recipients” of the service provision were the public who were getting health care service for free, which meant the Trust was providing services without a “price” in any meaningful sense. No difficulty arises, in our view, in the local authority being meaningfully considered as the recipient of the service and paying the price for its provision even if the ultimate beneficiary is the public from which no payment is sought. Indeed, it is through the Trust’s service provision to the local authority that the local authority is able to discharge its duty under the 2013 Regulations. In a similar vein, Mr Edwards submitted that it was relevant that there was a benefit to the interests of the NHS as a whole in the Trust providing the services, thereby avoiding greater “downstream” costs to the NHS otherwise arising from poorer public health. However, that there may be such important collateral benefits does not, in our view, undermine the proper analysis that the services were carried out by the Trust for consideration.

As regards the amount of payment, Mr Edwards also submitted that it was significant to the analysis that the sums did not take account of the Trust’s overheads. That was, he suggested, indicative of the performance of the duties being for the community as a whole rather than a simple quid pro quo. Again, the fact that the service provision would have wider benefits to the public is no way inconsistent with it being of clear benefit to the local authority. HMRC rightly pointed to the lack of specific evidence of the operating costs for provision of the services but, even if the point is assumed in the Trust’s favour, the case-law is clear that a lack of correspondence to market value, or cost of provision does not preclude there being consideration (see for instance [52] Wakefield referred to at [34] above) and more recently in the Latvian Information Case (Case C-87/23) at ([28]) (referred to in more detail under the next issue).

Mr Edwards’ reliance on the Trust’s treatment in its accounts of the payments for these services as “health income” (as opposed to “other income” - see the provisions of s43(2A) [20 ]) above) is also beside the point. However the income is described and accounted for by the recipient, the real question remains whether the income is payment for the relevant services pursuant to the requisite legal relationship. The evidence for such treatment by the Trust was not in any case clear but, even if it had been, there would be nothing inconsistent with income treated as health income by the Trust amounting to consideration for VAT purposes for the provision of the relevant health services.

Drawing on the Advocate General’s reasoning in Apple & Pear,Mr Edwards submittedthat the service provision was not “for consideration” because it was not consensual and because the local authority lacked control (see 234g and 235f). Apple and Pear concerned whether a statutorily imposed charge on apple and pear growers was consideration for supplies by the Council (whose functions related to promotion of the growers’ industry). The ECJ concluded it was not; the benefits accrued to the whole industry. That position was contrasted with an earlier scheme the Council ran (the Kingdom Scheme), funded part by grant and part by voluntary charges for services directed toward the specific growers. Supplies under that scheme were for consideration.

We consider that the Advocate General’s references to lack of consent and control can readily be understood in the context of the particular facts of that case in terms of explaining why there was not the requisite link between the growers’ payment and what the Council did for those growers in return. Neither of those factors is relevant in the same way on the facts here. The local authority was not mandated to make the payment to the Trust; it could choose whether to carry out the duties itself or to award the contract to someone else. Nor did the local authority lack control over what the service provider did. It could stipulate (in quite prescriptive terms as can be seen from the detail of the service descriptions in the agreements) what the service provider was required to do.

Standing back from all these arguments, none of the features relied on by the Trust, whether concerning the public nature of the bodies involved, the provision of the service or the funding, either alone or in combination, provides a basis, in our view, to suggest that the contractual position, according to which the Trust provides services to the local authority in return for payment, did not amount to a supply “for consideration”. The agreement is not simply, as Mr Edwards suggests, a mechanism for transfer of public funds but a contract under which services are provided in return for payment. His submission that the agreements were “not the product of hard-nosed negotiations in which risks are allocated” does not implicate the legal test for consideration for VAT purposes and does not reflect the evidence in any event, Mr Sands confirming that the contracts were “negotiated”. In our judgment, the contractual position does reflect the economic reality and there are no relevant vitiating facts.

Although Mr Edwards submitted that it was unrealistic to regard the payment as being given in return for services, in agreement with Mr Mantle, we consider it would be unrealistic to consider the opposite to be true. There would be no sense in the local authorities giving money away without any obligation on the counterparty, in this case the Trust, to provide the services contracted for. And from the service provider’s perspective, the fact that it was possible, as the Trust has done in some cases, to successfully bid to undertake services outside of the local area covered by the NHS foundation trust (see [25]) reinforces the point that the Trust was not carrying out these services to the local authority because it was obliged to do so, or that it is doing so for free. The Trust’s reference to Hong Kong Trade Development Council (Case 89/81) for the proposition that goods or services provided free are not supplied for consideration does not therefore assist; the contractual analysis and the economic reality confirm that the Trust performed the services in return for the payments from the local authority.

Mr Edwards also relied on passages in the same case conveying the sense of there being a negotiation and a bargain being struck which he submitted was inapposite regarding the position here of public bodies dealing with other public bodies and carrying out public functions. However, it is clear there was a competitive tender process. Even if NHS bodies might comprise the preponderance of tenderers, the public bodies here clearly reached their own bargain. As Mr Sands confirmed, this was after those parties had undertaken their own negotiation.

In our judgment, the payments made by the local authorities under the respective contracts were clearly “for consideration” for the purposes of Article 2. The Trust’s case on this issue therefore fails.

Regarding the Trust’s argument that it was inconsistent to treat the supply as “non-business” when all that had changed was the change in the funding entity from Clinical Care Commissioning Groups/ Public Health England to the local authorities - the “movement of some statutory deckchairs” as Mr Edwards put it - we express no view on whether the previous treatment was correct. The Trust’s judicial review claim is in respect of the correct legal treatment of the three specific supplies in the specific period between 2016 and 2019. That was correspondingly the focus of the evidence before us. We did not receive any detailed evidence on those prior arrangements and what, if any, agreements were in place and, if so, what their terms were. For similar reasons, it would not be appropriate to express a view on the correctness of HMRC’s treatment of other types of healthcare supply or on Mr Edwards’ more general submission that there are very many contracts performed within the NHS system, in respect of which, he says, HMRC do not treat the relevant supplies as being “for consideration”.