Upper Tribunal denies VAT zero-rating for secure mental health unit in NHS Ayrshire v HMRC

The Upper Tribunal has confirmed that construction services for the sleeping accommodation of a medium-secure adolescent mental health facility do not qualify for VAT zero-rating, because that accommodation cannot be separated from the hospital of which it forms part. The decision of Judge Ashley Greenbank and Judge Phyllis Ramshaw in NHS Ayrshire and Arran Health Board v HMRC, released on 7 July 2026, dismisses the health board's appeal on all grounds.

The dispute concerned the National Secure Adolescent Inpatient Service, built within the grounds of Ayrshire Central Hospital to treat up to twelve detained young people aged between 12 and 18, most of whom have been convicted of violent offences and all of whom are detained under court order for treatment of a mental disorder. The health board argued that the accommodation or "bedroom wing", comprising twelve en-suite bedrooms, lounges and a courtyard, was intended for use solely for a "relevant residential purpose" within item 2, Group 5, Schedule 8 of the Value Added Tax Act 1994, so that its construction should be zero-rated.

The relevant residential purpose categories in Note (4) cover, among others, homes or institutions providing residential accommodation for children or for those needing personal care by reason of mental disorder, and institutions that are the sole residence of at least 90 per cent of their residents. Each is subject to an exception for use as a hospital, prison or similar institution. Note (10) allows partial zero-rating where one part of a building qualifies and another does not.

The wing could not be isolated

The First-tier Tribunal had found that the bedroom wing was an integral and inextricable part of a complex whose primary purpose was to deliver medical treatment, that treatment within the meaning of the Mental Health (Care and Treatment) (Scotland) Act 2003 continued throughout the wing, and that no part of the complex was intended for use solely for a relevant residential purpose.

Upholding that approach, the Upper Tribunal rejected the argument that the wing had to be assessed in isolation. Drawing on Sir Andrew Morritt C's analysis in Fenwood Developments, it held that where the exception is potentially engaged, the task is to contrast the relevant residential category with the exception, and that this comparison may require regard to the use of the rest of the building. Here the interdependence was decisive. Patients ate and received visitors elsewhere in the complex, the nursing staff in the wing were qualified professionals whose observations fed into care plans, and the treatment delivered there was a continuation of an integrated course of treatment provided across a facility that was admittedly a hospital.

The tribunal distinguished Fenwood and Pennine Care, where the primary purpose was care rather than treatment. It also held that the wing was not a self-standing "home" or "institution", the only institution of which it formed part being the hospital itself, and that the mere fact patients had no other residence did not compel a residential characterisation.

A new argument shut out

The health board had sought to widen its case to include contiguous kitchen and dining areas, a point never advanced before the First-tier Tribunal. Applying Manduca and echoing the principle that a trial is not a dress rehearsal, the tribunal refused to admit it, since it would require fresh evidence, an adjournment and cross-examination, to HMRC's material prejudice.

The appeal was dismissed in its entirety.