Only Binding Law Creates a “Special Legal Regime” for Article 13 PVD; Non‑Taxation of NHS Hospital Parking Significantly Distorts Competition

Introduction

In Northumbria Healthcare NHS Foundation Trust v Revenue and Customs [2025] UKSC 37, the United Kingdom Supreme Court resolved whether an NHS foundation trust’s hospital car parking is outside the scope of VAT under Article 13(1) of Council Directive 2006/112/EC (the Principal VAT Directive, “PVD”) and section 41A Value Added Tax Act 1994 (“VATA 1994”), on the ground that the Trust was “acting as a public authority”.

Two cumulative questions lay at the heart of the appeal:

First, whether the Trust’s car parking supplies were made under a “special legal regime” applying to it as a public authority, as distinct from the regime applying to private operators (Article 13(1), first subparagraph); and
Second, whether treating the Trust as a non-taxable person would lead to “significant distortions of competition” (Article 13(1), second subparagraph; section 41A(3) VATA).

The sums at stake were modest for the respondent Trust (£267,443) but potentially up to £100 million across approximately 70 stayed NHS appeals. The First-tier Tribunal (“FTT”) and Upper Tribunal (“UT”) dismissed the Trust’s appeal; the Court of Appeal allowed it; the Supreme Court has now allowed HMRC’s appeal, restoring a principled and exacting framework for Article 13.

Summary of the Judgment

Purpose of Article 13. The Supreme Court rejected the Court of Appeal’s view that Article 13(1) pursues a broad public interest of enabling public authorities to retain more revenue or reduce user costs (CA at [88]). The provision is a tightly confined derogation from the general VAT rule, aimed at excluding from VAT only those economic activities of public bodies carried out under a public law regime; its scope is cabined to protect fiscal neutrality and prevent competitive distortions (see especially [50]-[54]).
What counts as “acting as a public authority”. The governing test remains the Carpaneto criterion: is the activity carried out under a special legal regime that applies to the public body and not to private traders? Using specific public powers in the activity (e.g., fines, authorisations) suffices; merely acting within a general statutory framework, or under guidance, does not (see [68]-[76]).
Guidance is not law for Article 13. External guidance, even combined with the public law duty to follow guidance absent good reason, does not establish a special legal regime with the requisite legal certainty. Guidance lacks binding force; its inherent flexibility and the general duty to adhere (which applies to all public bodies) cannot write a public body’s VAT status ([79]-[90]).
Interaction with Article 132. A body that fails to qualify for the specific exemption for “hospital and medical care and closely related activities” (Article 132(1)(b)) cannot use Article 13(1) to obtain an equivalent result through the back door ([93]).
Distortion of competition. Although unnecessary for disposal, the Supreme Court held that the FTT’s finding of significant distortion was sound. The relevant activity is car parking for reward near hospitals; hospital and private car parks provide identical or similar services from the consumer’s standpoint and are in actual and potential competition. Non-taxation would more than negligibly distort competition, either via lower prices or higher retained profits, and could deter market entry ([106]-[123]). No granular market analysis is required in every case ([110]-[118]).
Outcome. HMRC’s appeal allowed on ground 3 (special legal regime). The Court also indicated it would have allowed the appeal on ground 4 (distortion).

Analysis

Precedents Cited and Their Influence

Carpaneto (Joined Cases C-231/87 and C-129/88): Established the decisive criterion for Article 13’s first condition—what matters is the way the activity is carried out. Public bodies act “as public authorities” where the activity is performed under a special legal regime applicable to them, not where they operate under conditions akin to private law ([57]; Carpaneto paras 15–16). This is the bedrock test the Supreme Court applies.
Fazenda (Case C‑446/98): In a municipal parking context, demonstrated that employing public powers (e.g., authorising/restricting on-street parking; imposing fines) evidences a special legal regime ([59]-[61]). The Supreme Court uses this to illustrate what counts as a public-law constraint that is qualitatively different from private operators’ contractual penalties.
Saudaçor (Case C‑174/14): Affirms strict interpretation of derogations; mere possession of public powers is insufficient if they are not used for the disputed activity ([62]-[66], [72]). The Court draws on this to reject reliance on general statutory frameworks or unused powers.
Commission v Ireland (Case C‑554/07, 2009): Confirms that acting pursuant to a general statutory or constitutional framework does not, by itself, mean the activities are carried on “as a public authority” ([63]). The Supreme Court deploys this to underline that generic public law scaffolding is not enough.
Isle of Wight (CJEU) [2008] STC 2964; and domestic litigation:
- For the competition proviso, the CJEU held that “significant distortions of competition” are assessed by reference to the activity as such, at a high level of abstraction and not by local market ([96]-[101]). “Significant” means “more than negligible” ([100]).
- Domestically, the litigation clarified that there is no irrebuttable presumption of distortion; but common-sense economic inference is available and rebuttable with evidence ([112]).
National Roads Authority (Case C‑344/15): Reinforces that Article 13(1) second subparagraph requires an assessment of economic circumstances and includes potential competition where entry is real, not theoretical; a purely hypothetical entry cannot suffice ([101]-[105]). The Supreme Court uses this to explain why detailed market studies are not mandated in every case and to distinguish situations with genuinely closed markets.
Taksatorringen (Case C‑8/01): In the different context of the cost-sharing exemption, the CJEU stressed that it must be the exemption (or non-taxation) itself that causes distortion ([106]). The Supreme Court imports that causal discipline into Article 13 analysis.
Rank (Joined Cases C‑259/10 and C‑260/10): Clarifies that differential VAT treatment of similar supplies generally produces a distortion of competition (para 35). The Supreme Court cautions that Rank does not create a legal presumption satisfying Article 13’s second subparagraph, but that its logic is a permissible evidential inference ([113]-[116]).
Expert Witness Institute [2002] 1 WLR 1674: Applied domestically to emphasise strict yet fair interpretation of derogations ([55]).
Munjaz [2006] 2 AC 148; Hemmati [2021] AC 143: Cited by the Court of Appeal on guidance-as-law. The Supreme Court distinguishes them contextually; nothing in those decisions converts non-binding guidance into a tax-determinative legal regime with the requisite certainty for Article 13 ([90]-[91]).
Eynsham Cricket Club [2021] 1 WLR 3220: Chosen legal regimes (e.g., CASC vs charity) have binding consequences. The Supreme Court contrasts that with flexible, non-binding guidance ([88]).

Legal Reasoning

(1) The purpose of Article 13(1) and its strict construction (Ground 1)

The Court rejected the Court of Appeal’s public-interest gloss that Article 13(1) aims to allow public bodies to retain revenue or subsidise user costs ([50]-[54]). Instead:

Article 13(1), first subparagraph, is a narrow derogation from the general VAT rule; it removes from VAT only those economic activities carried out under a public law legal regime or with specific public powers.
The second and third subparagraphs cabin the derogation to preserve fiscal neutrality by re-imposing VAT where competitive distortions would otherwise arise ([52]-[54]).
Derogations are interpreted strictly, though not so narrowly as to deprive them of effect ([55]-[56]).

(2) Acting “as a public authority”: only binding law counts; guidance does not (Ground 3)

Applying Carpaneto and Fazenda, the Supreme Court held:

A public body acts “as a public authority” where the activity is conducted under a special legal regime applying to the public body, not under the ordinary legal conditions for private traders ([57]-[61]).
Qualifying legal constraints must impose binding obligations with legal certainty, i.e., primary, secondary, or tertiary legislation with force of law (including instruments like VAT notices that have legal effect) ([79]-[81]).
Non-binding guidance—even if externally issued and subject to a public law duty to follow absent good reason—does not create a tax-determinative legal regime. Its flexibility, potential for departure, and amendability undermine legal certainty; equating guidance with law would enable public bodies (or non-legislative overseers) to self-author their tax status, which is antithetical to VAT’s principles of legal certainty and fiscal neutrality ([81]-[89]).
No meaningful distinction exists between internal and external guidance in this context; in either case it is guidance, not law ([84]-[86]).
General statutory powers to provide services or generate income (e.g., NHS Act 2006, s.43) are not enough; nor is the mere existence of public powers unless used in the activity at issue ([90]-[93]).
Allowing guidance to suffice would also impermissibly circumvent the specific, stricter conditions of Article 132(1)(b) (e.g., “closely related” care) via the broader Article 13 route ([93]).

On that footing, NHS car parking guidance (2015 Parking Principles, HTM 07‑03, Car Parking Best Practice) could not constitute the requisite special legal regime. The Trust’s car parking was therefore not supplied “as a public authority”.

(3) Distortions of competition: logic, not local granularity (Ground 4)

Although unnecessary for disposal, the Court addressed the second condition comprehensively:

Relevant activity: car parking for reward at or near hospital sites, viewed from the consumer’s perspective ([106]-[108]).
Comparators: hospital car parks and nearby private car parks are identical or similar supplies meeting the same consumer need; in principle they are in actual and potential competition ([108]-[109]).
Assessment frame: evaluate by reference to the activity “as such” at a high level of abstraction, not by local market studies (Isle of Wight CJEU) ([99]-[101], [110]-[112]).
Threshold: “Significant” means “more than negligible” ([100]).
Actual and potential competition: include both, but potential entry must be real rather than purely hypothetical (National Roads Authority) ([101]-[105]).
Causation: distortion must be due to non-taxation itself (Taksatorringen) ([106]).
Evidence: HMRC bears the burden. There is no presumption of distortion; however, tribunals may, as a matter of logic and common sense, infer that differential VAT treatment of similar supplies tends to distort competition (Rank, para 35), subject to rebuttal by evidence ([112]-[116]). Detailed econometrics are not required in every case ([110]-[118]).

Applying those principles, the FTT’s approach was upheld as orthodox and sufficient: the national level car parking activity involves actual competition; there is substantial unmet demand around hospitals; non-taxation would enable lower pricing or higher profit retention by the public body—either pathway produces a more than negligible distortion and may deter entry ([117]-[123]). The Court of Appeal’s focus on whether the Trust would in fact reduce prices, or on the identity of the supplier (retention for NHS purposes), was a legal misstep: the identity of the supplier is irrelevant; the distortion flows from the differential fiscal treatment of similar supplies ([120]-[121], [114]).

(4) “Closely linked” is not an Article 13 test (Ground 2)

The Supreme Court agreed that scattered references to activities “closely linked” in certain CJEU cases do not displace Carpaneto’s test for Article 13. “Closely related/linked” retains its role in Chapter 2 exemptions such as Article 132, not in defining “acting as a public authority” ([74]-[76]).

Impact and Future Significance

Immediate consequences

NHS car parking is a taxable economic activity. Trusts cannot invoke Article 13(1) by pointing to NHS/DoH guidance on tariffs, concessions, or enforcement practices. Unless an activity is genuinely conducted under binding legal rules specific to public bodies or uses public powers in that activity, Article 13 will not shield it.
Stayed NHS appeals. The up to 70 stayed cases are likely to fall in line with this outcome on the first condition. Even if any case argued a different first condition, the Supreme Court’s treatment of the second condition makes the distortion proviso a substantial hurdle for non-taxation in hospital parking.
Input tax and partial exemption. Public bodies charging VAT on car parking will also need to consider input VAT recovery on related costs, subject to partial exemption and business/non-business apportionment.

Broader reach across public bodies

Guidance vs law. Across sectors (e.g., leisure, cultural services, waste, transport), non-binding guidance—even if mandatory as a matter of public law adherence—is insufficient to demonstrate a special legal regime for Article 13. If government wishes to confer non-taxable status because an activity is truly public in nature, it must do so via legislation or instruments with force of law that materially constrain the activity.
Use of public powers matters. Where the activity is performed with public powers (licensing, authorisations, fines, regulatory discretions unavailable to private actors), that may satisfy the first condition, subject to the second condition on distortion.
Distortion threshold is not onerous where similar supplies exist. Tribunals may draw common-sense inferences that non-taxation of a public supplier competing with taxed private suppliers distorts competition more than negligibly, without commissioning localised market studies, unless the public body can produce convincing rebuttal (e.g., genuinely closed markets akin to National Roads Authority).

Policy design and legislative drafting

To create a “special legal regime”, legislate. Departments seeking to recognise the public character of an activity should do so via binding instruments that impose concrete, legally certain constraints specific to public bodies (e.g., statutory tariffs, mandatory concessions with legal force, statutory enforcement powers). Soft law will not suffice.
But beware the competition proviso. Even where a special legal regime exists, Article 13(1) second subparagraph may still require taxation if non-taxation would more than negligibly distort competition. Annex I activities are taxed in any event unless negligible.
Do not use Article 13 to replicate Article 132 exemptions. Where the legislature has set precise exemption conditions (e.g., “closely related” to hospital care), Article 13 cannot be used to achieve an equivalent outcome by relabelling the activity as the exercise of public authority.

Complex Concepts Simplified

Article 13(1) PVD “acting as a public authority”: A public body’s economic activity is non-taxable only if, in performing that activity, it operates under public-law rules or powers that do not apply to private traders (e.g., fines, authorisations). Mere guidance or general statutory capacity is not enough.
“Special legal regime”: Binding national law (primary, secondary, or tertiary with force of law) that materially constrains how the public body performs the activity. Policies/guidance are not a special legal regime.
Fiscal neutrality: Similar supplies should bear the same VAT burden. Allowing public bodies to avoid VAT when private competitors must charge it risks distorting competition.
“Significant distortion of competition”: Means “more than negligible”. Assessed by reference to the activity at a high level of abstraction (not micro local markets). Covers actual and potential competition, but potential entry must be real, not hypothetical.
“Activity as such”: Define the service from the consumer’s perspective (here: parking a car near a hospital for consideration), not by the user’s purpose (hospital visit vs shopping).

Practical Roadmap for Public Bodies and Advisers

Identify the activity precisely from the consumer’s perspective.
Ask: Is the activity carried out under binding public-law rules or specific public powers that materially affect how it is performed, and are unavailable to private operators?
- If yes, the first condition of Article 13 may be met. If no, it is not.
If the first condition is met, test the second: would non-taxation more than negligibly distort competition, considering actual and real potential competition nationwide?
- Bear in mind: logic and common sense often support distortion where private suppliers exist or could enter.
- Rebuttal requires evidence showing either no competition (actual or real potential) or that any effect is negligible.
Do not rely on non-binding guidance to shape VAT outcomes. If a public interest exemption is intended, consider whether an Article 132 exemption applies and, if not, whether legislative change is needed.

Conclusion

The Supreme Court delivers two system-shaping clarifications. First, only binding legal constraints—not guidance, however “mandatory” in public law terms—can satisfy Article 13(1)’s “special legal regime” requirement. This preserves legal certainty and prevents public bodies from effectively setting their own tax status. Second, for Article 13’s competition proviso, tribunals may rely on orthodox economic logic at the level of the activity “as such”: when public and private suppliers offer similar car parking, non-taxation of the public supplier will ordinarily, and more than negligibly, distort competition, without the need for granular local market analysis.

The decision reinforces fiscal neutrality at the interface of public and private provision, reaffirms the primacy of legislation over soft law in determining tax status, and provides a clear methodology for future cases at the boundary of Article 13 and the competition proviso. For NHS bodies and other public authorities, the message is plain: car parking and comparable ancillary services are taxable absent binding, activity‑specific public law constraints—and even then, the distortion proviso will often restore the general VAT rule.