The High Court has ruled the foundation trust regulator Monitor has been unlawful in its interpretation of the private patient income cap.

The cap limits the income foundation trusts are able to earn from private patients. The trade union Unison brought a judicial review arguing that Monitor was breaking the law by allowing foundations to not count private patient income if it had been channelled through structures such as charities.

In his judgement, issued this morning, Mr Justice Cranston ruled that “Monitor has misdirected itself in law” and must amend its rules so as to capture more income when it calculates the cap.

He said that must mean “any income from an intermediate structure, imposed to perform private work… is caught by the cap”, including income accounted for as “rent” or “charitable donations”, which was “in reality” and “origin” derived from providing services to private patients.

Last year Monitor consulted on its interpretation and tightened its rules to capture more income under the cap but not as much as the judge has now ruled should be included.

In his judgement today Mr Justice Cranston criticised the way Monitor conducted that consultation saying it failed to give “any real consideration of the statutory” issues at stake, instead focusing on the apparent “unworkability and adverse consequences” of Unison’s demands for the cap to be extended.

“Whether [Monitor’s interpretation] fitted with the statutory concept does not seem to have entered the board’s deliberations, or if it did, it was certainly not at the forefront,” the judge said.

He said his ruling against Monitor did not mean he necessarily endorsed Unison’s favoured extension to include all forms of income ultimately derived from private patients.

However he was clear that the interpretation of cap needed to be changed in order to capture more sources of income than Monitor currently requires. He said too that it was not correct to argue that a ruling against Monitor would have “unjust, inconvenient or absurd consequences”, as Monitor and the Foundation Trust Network have suggested by saying it would lead to endless tracing exercises to identify the source of funds.

But he refused to rule that past financial accounts of foundation trusts – including those for 2008-09 - be unravelled and recalculated to include private patient income previously left out. He said the latter would be “unduly disruptive and a waste of public resources”.

Unison general secretary Dave Prentis said: “Today’s decision is a victory for NHS patients. The bill introducing foundation trusts allowed them to treat private patients, but included a safety net of a cash limit.  That limit was designed to ensure that private patients could not buy their way to the front of the queue at the expense of NHS patients.”

Monitor has accepted the ruling and said it would now amend its approach. Its executive chairman William Moyes said: “This is a complicated issue as was demonstrated by the various arguments in court and the divergence of views we received when we consulted on our interpretation of the cap. We accept the outcome of this judicial review and will now focus on amending the regulatory framework in line with the ruling of the court.

The government is already reviewing the working of the cap, which could result in a removal or relaxation of it. In this respect Mr Moyes said: “We are also hopeful that government’s review of this piece of legislation will address any remaining concerns or doubts that may exist regarding the application of the cap.”