Introduction

The case of Revenue and Customs v. Northumbria Healthcare NHS Foundation Trust ([2020] EWCA Civ 874) was heard by the England and Wales Court of Appeal (Civil Division) on July 10, 2020. The central issue revolved around whether the Northumbria Healthcare NHS Foundation Trust ("the Trust") was entitled to a refund of Value Added Tax (VAT) incurred during the acquisition of motor cars provided to its employees under a salary sacrifice scheme.

The Trust operates under the Health and Social Care (Community Health and Standards) Act 2003, providing hospital and community health services in North Tyneside and Northumberland. It offers car leasing services to its employees and employees of other public sector organizations through favorable commercial terms, branding its services as "NHS Fleet Solutions". The Upper Tribunal had previously ruled in favor of the Trust, allowing it to claim a VAT refund, a decision upheld on appeal by the Court of Appeal.

Summary of the Judgment

The Court of Appeal dismissed HMRC's appeal against the Upper Tribunal's decision, thus upholding the Trust's entitlement to a VAT refund under section 41(3) of the Value Added Tax Act 1994 (VATA). The court held that the provision of cars to employees under the salary sacrifice scheme did not constitute a supply for VAT purposes due to the applicable De-Supply Order. Consequently, the Trust was not engaged in a business activity concerning this arrangement, qualifying it for the VAT refund. The judgment emphasized the distinction between the concepts of "supply" and "economic activity" within VAT law and reaffirmed that non-supply activities by public sector bodies could be eligible for VAT refunds.

Analysis

Precedents Cited

The judgment extensively cited several precedents and authoritative cases to underpin its legal reasoning:

• Wakefield College v HMRC [2018] EWCA Civ 952: Clarified that a supply for consideration is a necessary but not sufficient condition for an economic activity.
• Fowler v HMRC [2020] UKSC 22: Provided principles for interpreting statutory deeming provisions, emphasizing that such provisions should align with legislative intent and avoid unjust outcomes.
• Geemente Borsele v Staatssecretaris van Financiën [2016] STC 1570 and MVM Magyar Villamos Müvek Zrt v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága [2017] STC 452: Highlighted the necessity of supply for an activity to qualify as economic activity under VAT directives.
• Ghent Coal Terminal NV [1998] STC 260: Addressed the right to deduct VAT even when intended economic activities are frustrated, reinforcing that the purpose behind VAT deductions must align with taxable transactions.

Legal Reasoning

The court's legal reasoning centered on interpreting section 41(3) of VATA in conjunction with the Contracted Out Services Direction (COSD). The De-Supply Order within COSD specifically excluded the provision of cars under salary sacrifice schemes from being treated as a supply. As per the Principal VAT Directive, a "taxable person" engaged in economic activity must make or intend to make taxable supplies. Since the Trust's provision of cars to employees was deemed a non-supply, it was not engaged in economic activity in this context, thereby qualifying for a VAT refund.

The court applied the principles from Fowler v HMRC, ensuring that the De-Supply Order was interpreted to avoid unjust outcomes, such as the Trust not being able to claim VAT refunds despite the structural implications of the deeming provision. Additionally, the court reasoned that since the Trust did not engage in taxable transactions through the supply of cars to its employees, it had no right to deduct input tax, thus validating the refund claim under section 41(3).

Impact

This judgment has significant implications for VAT law, particularly concerning public sector bodies and their eligibility for VAT refunds when engaging in non-business activities. It reinforces the interpretation that non-supply activities conducted by public entities can qualify for VAT refunds, provided they meet the statutory criteria. Future cases involving salary sacrifice schemes and similar arrangements may reference this judgment to determine VAT refund eligibility. Furthermore, it underscores the importance of distinguishing between supply and economic activity in VAT considerations, potentially influencing legislative reviews and administrative practices within public sector organizations.

Complex Concepts Simplified

VAT and Its Relevance

Value Added Tax (VAT) is a consumption tax placed on goods and services at each stage of production or distribution. In this case, the Trust sought a refund of VAT paid when acquiring cars for its employees, as it did not pass on the VAT to its supply chain due to the nature of its activities.

Supply vs. Economic Activity

Supply: In VAT terms, a supply refers to the provision of goods or services in exchange for consideration (payment). If an entity supplies goods or services that are subject to VAT, it must adhere to VAT regulations, including charging VAT and potentially reclaiming VAT paid on related expenses.

Economic Activity: This refers to any activity that constitutes an economic undertaking, including the production, distribution, or provision of goods and services. For an entity to be a "taxable person" engaged in economic activity, it must make taxable supplies.

De-Supply Order

The De-Supply Order is a specific provision that treats certain transactions as not being supplies for VAT purposes. In this case, it stated that providing cars to employees under a salary sacrifice scheme does not constitute a supply, thereby excluding it from VAT obligations.

Section 41(3) of VATA

This section allows government departments to claim refunds of VAT on certain transactions that are not part of their business activities. The Trust utilized this provision to reclaim VAT on car acquisitions, arguing that the provision of cars was a non-business activity under the De-Supply Order.

Conclusion

The Court of Appeal's decision in Revenue and Customs v. Northumbria Healthcare NHS Foundation Trust reaffirms the eligibility of public sector bodies to claim VAT refunds on non-business activities, specifically within salary sacrifice schemes. By distinguishing between supply and economic activity, the court underscored the nuanced application of VAT laws, ensuring that entities engaging in non-commercial arrangements are not unduly burdened by tax obligations. This judgment not only clarifies the interpretation of VAT provisions related to public sector activities but also provides a judicial precedent that will guide future cases involving VAT refunds and non-supply activities within the public domain. The decision emphasizes the importance of precise statutory interpretation in tax law, balancing legislative intent with equitable outcomes.