Foundation trusts are wrangling with HM Revenue and Customs over its plan to levy the 28 per cent corporation tax on their commercial profits.

Foundation trust finance directors expect the tax to apply as early as next April.

The move to tax foundation trusts' commercial profits follows pressure to ensure a level playing field between private and public enterprises. But foundation trust representatives and Whitehall officials have yet to agree what constitutes "commercial" activity for a foundation trust. Foundation Trust Network director Sue Slipman told HSJ: "The impact on foundation trusts could be very significant."

In theory, the 28 per cent levy would be payable on profits flowing from non-NHS activity such as private patients. But while foundations may be able to distinguish income from non-NHS sources fairly readily, separating out the operating costs to derive the profit from those activities will sometimes be much harder.

Ms Slipman said that a further complication involved services that foundations ran for other NHS and private organisations, such as laundry, as it was not clear what would be deemed "commercial". Nor was it clear whether income from other public bodies, like universities, would be regarded as commercial.

"The tax people are quite clear they are not trying to trap NHS activity under this, but the transaction costs may be quite high," Ms Slipman said.

Powers and exemptions

NHS organisations are exempt from corporation tax under the Taxes Act 1988, but the Finance Act 2004 gave the Treasury the power to remove that exemption for foundation trusts and it has now told the Department of Health it intends to do so.

A Revenue and Customs spokesman said the Treasury had not yet estimated the extra revenue it would gain from taxing foundation trusts.

"No decision has yet been taken by ministers as to how or when this will happen," he said. The DH, Monitor, the Foundation Trust Network and the Healthcare Financial Management Association were being consulted "to ensure anything that may be implemented is done in a manner which causes the least possible disruption".