Northumbria Healthcare v HMRC: NHS car parking and VAT liability clarified

The Supreme Court has clarified the circumstances in which NHS bodies can avoid VAT liability when providing car parking services, allowing HMRC's appeal and overturning the Court of Appeal's decision in Northumbria Healthcare NHS Foundation Trust v Commissioners for His Majesty's Revenue and Customs [2025] UKSC 37.

Northumbria Healthcare NHS Foundation Trust challenged HMRC's determination that VAT was chargeable on car parking supplies at its hospital sites during accounting periods between May 2013 and March 2016. The central issue concerned whether the Trust qualified as a non-taxable person under Article 13 of the Principal VAT Directive and section 41A of the Value Added Tax Act 1994.

Article 13(1) provides that public authorities are not regarded as taxable persons for activities they engage in as public authorities, subject to two conditions: the activities must be carried out under a "special legal regime" applicable to public bodies, and non-taxation must not lead to significant distortions of competition.

Special legal regime requirement

The Court of Appeal had accepted that Department of Health guidance on car parking, combined with the Trust's public law duty to adhere to such guidance absent good reason, constituted a special legal regime. The Supreme Court unanimously disagreed.

Lord Hodge and Lady Simler, delivering the leading judgement, emphasised that mere guidance—even externally imposed—does not create legal obligations with the certainty required in VAT contexts. The flexibility inherent in guidance, which permits departure in appropriate circumstances, militates against it constituting a special legal regime.

Critically, the Court held that every public body is subject to general public law principles requiring adherence to guidance. If this obligation alone could satisfy the "special legal regime" test, it would deprive the requirement of meaningful effect and contradict the need to construe derogations from VAT liability strictly. The Court noted that accepting the Trust's position would permit public bodies to determine their own tax status through self-authored or externally-imposed guidance, fundamentally undermining legal certainty.

The Supreme Court distinguished between legally binding provisions (primary, secondary, or tertiary legislation with force of law) and guidance. Whilst the former can create special legal regimes, the latter cannot, regardless of whether internally or externally generated.

Distortion of competition analysis

Although unnecessary given the finding on special legal regime, the Court addressed the distortion of competition test. The Court of Appeal had erred in concluding HMRC failed to prove significant distortions would result from non-taxation.

The Supreme Court held that where actual competition exists between similar supplies meeting the same consumer needs, differential VAT treatment will generally distort competition. The First-tier Tribunal had correctly found actual competition between the Trust's car parks and private operators, coupled with substantial unmet demand. This evidence sufficiently demonstrated more than negligible distortion.

The Court rejected arguments requiring granular market analysis, noting that assessment must be "by reference to the activity in question, as such" at a high level of abstraction. The ability of non-taxable bodies to retain greater profits or reduce prices creates competitive disadvantage for private operators and may deter market entry.

This judgement clarifies that NHS bodies cannot rely on departmental guidance to escape VAT liability on commercial activities like car parking. With up to 70 similar appeals stayed behind this case involving approximately £100 million, the decision has substantial revenue implications and provides important guidance on interpreting Article 13 derogations from VAT liability.