Trust wins £14m after legal battle with government over car scheme

Northumbria Healthcare Foundation Trust successfully brought a legal challenge against Her Majesty’s Revenue and Customs after the department initially refused the trust’s application to reclaim VAT on cars used for an in-house transport service for public sector staff.

HMRC is considering whether to appeal against the decision.

Since 2005, the trust has run NHS Fleet Solutions – a car lease scheme for the NHS and other public sector organisations which sees staff give up part of their salary in exchange for a car.

The scheme offers staff potential tax, national insurance and pension benefits. The trust’s fleet comprises approximately 21,000 vehicles and is used by around 170 organisations.

In March 2017 the trust submitted a claim to HMRC for VAT refunds worth £14m incurred in respect of leased and maintained cars between 2012 and 2017.

During that five-year period, HMRC had restricted the trust’s VAT refunds by 50 per cent, but the trust believed it was entitled to the full amounts. However, the application was rejected by HMRC in January 2018, prompting the trust to seek a judicial review. 

In its evidence to the Upper Tribunal (Tax and Chancery Chamber), HMRC considered that the trust was not entitled to the full refund because the car scheme was a “business activity”. It also argued a potential refund should only apply from September 2017 and onwards due to time limits on such applications.

But the trust said its car leasing activities were “not a business or economic activity for VAT purposes” in relation to leasing cars to staff working for organisations inside the national divisional VAT registration.

It argued the scheme is used for the “non-business provision of statutory healthcare”, and that its purpose in offering the scheme was “solely directed to the better discharge by the trust of its statutory functions”.

In their judgment, Mr Justice Henry Carr and Judge Greg Sinfield did not accept HMRC’s claim that the trust’s provision of cars to employees was an economic activity or part of an economic activity within the trust.

This meant the trust was entitled to recover all the VAT incurred.

Paul Dunn, the trust’s executive director of finance, told HSJ he welcomed the judgment but said he could not comment further due to the possibility of an appeal.

The trust’s success also means it can apply for its legal costs to be paid by HMRC.

An HMRC spokeswoman said: “In all cases, HMRC pays the reasonable costs of litigation to the extent these are due from it.”

According to its May board papers, the trust – which is rated “outstanding” by the Care Quality Commission – recorded a £33.7m surplus in 2018-19, which was £8.5m better than its control total.

The £534m-income trust is led by former NHS Improvement chief executive Sir Jim Mackey.