Howard Watkinson acts for HMRC in the Supreme Court in VAT case concerning public body exemption.
This morning the Supreme Court handed down its judgment in an important VAT case concerning the exemption for public bodies, and the approach to establishing distortion of competition in Art.13 of the Principal VAT Directive (“PVD”), and s.41A of the Value Added Tax Act 1994 (“VATA”).
In HMRC v Northumbria Healthcare NHS Foundation Trust [2025] 37 the Supreme Court unanimously allowed HMRC’s appeal against the Court of Appeal’s decision.
The Supreme Court ruled that:
The Court of Appeal’s conclusion that the objective of Art.13 PVD was “the broad public interest one of allowing public authorities flexibility in the exercise of their public functions to choose either to use more of the revenue generated for public services than they otherwise could, or to contain the cost of the service in question for its users.” was wrong, at [50] – [51].
Guidance as to how the activity in question is to be carried out, combined with a legally enforceable duty to adhere to that guidance unless there is a good reason to depart from it, was not sufficient to constitute a special legal regime for the purposes of satisfying the second condition in Art.13(1) of the PVD, at [77-90].
It is not necessary in every case to produce detailed factual and expert evidence to determine the existence of a distortion of competition for the purposes of Art.13(1) PVD, at [110]. HMRC can rely on the proposition of fact that differential tax treatment of similar offerings does generally distort competition, at [114], and the public authority can then adduce evidence that there is in fact no distortion of competition in the circumstances of a particular case. The test may be hard to satisfy, but not impossible for a public authority, at [115].
The assessment of distortions of actual or potential competition as more than negligible does not require an assessment of the effect of non-taxation on the pricing or retained profit decisions of the public body in question, at [131].
The case is likely to have a significant effect on the circumstances in which public bodies can claim the benefit of the Art.13 PVD/s.41A VATA exemption.
Howard Watkinson represented HMRC throughout the proceedings and was led by Nigel Pleming KC in the Supreme Court.
The judgment and press summary can be found here.
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