Foundation trusts seeking to maximise income from private patients have been dealt a blow this week by legal actions involving their regulator Monitor and the Charity Commission.

Unison, Britain's biggest union, has challenged Monitor over the legality of a loophole that lets foundation trusts avoid a cap on private income by setting up a separate company to take and make payments.

Unison's move comes as the Foundation Trust Network lobbies ministers in the opposite direction to loosen the current cap on private income, which it believes 'stifles innovation'.

After receiving a formal letter from Unison last week - interpreted as the first step in a judicial review process - Monitor said it would review its policy on private income.

If the courts rule Monitor's current guidance is illegal, foundation trusts could be drawn into legal proceedings and potentially forced to sacrifice millions in income.

A spokeswoman for Monitor said: 'Unison has said that if Monitor does not change its approach, it will commence proceedings for judicial review.' She said the regulator would announce its conclusions in early 2008.

The private patient income cap - contained in the 2003 and 2006 health acts - was a key concession to quieten Labour MPs threatening to vote against the legislation.

Unison is claiming that Monitor's rules interpret private income too narrowly by implying that only charges and services imposed and delivered by the foundation trust itself count towards the cap. That opened the way for trusts to establish separate entities through which private activities would be channelled. Although the income ends up with the foundation trust - either through a donation or a contract - it does not count as private income.

Unison head of health Karen Jennings said: 'Monitor's manual fails to comply with the Health Act. We believe the manual should state that "private patient income" covers any income arising howsoever from the provision of private services, whether by the foundation trust itself or by the other body.'

But Foundation Trust Network director Sue Slipman said she did not believe Monitor would change guidance it had created 'after a lot of thought'. 'We see no case for change,' she said.

Ms Slipman said it was unrealistic to expect the cap to be removed completely. Instead the network was lobbying ministers to 'redesignate what comes under the cap' to give trusts more flexibility.

Trusts planning to or already making use of the loophole include: Salisbury, University College London Hospitals, Chelsea and Westminster Hospital, North Bristol and Great Ormond Street Hospital for Children. Great Ormond Street has said that without a way round the cap, it will lose£8m a year when it becomes a foundation trust.

Frank Dobson, former health secretary and a leading Labour rebel over the 2003 legislation, told HSJ: 'The cap was introduced by the government as one of the measures to persuade people to vote for foundation trusts. No-one should now be administratively trying to set aside an undertaking which was given to Parliament.'

In a separate move the Charity Commission was to announce yesterday that it would not be granting charitable status to the vehicle Salisbury foundation trust had established for avoiding the cap. Salisbury had hoped Odstock Private Care would be granted charitable status as that would allow it to claim certain tax benefits. Similar arrangements have been sought by Great Ormond Street, North Bristol, and Chelsea and Westminster.

In a decision that is expected to set a precedent, the commission said it had refused charitable status because poor people would be excluded from Odstock's services, so it failed the public benefit test.

How the cap on private patient income works

The private patient income cap means that foundation trusts must not expand the percentage of their total income they get from private patients beyond what it was in 2002-03.

The 2003 Health Act defines private patient income as: 'Charges imposed in respect of goods and services provided to patients other than patients being provided with goods and services for the purposes of the NHS.'

Monitor's financial reporting manual defines private patient income as: 'Income arising from charges imposed by the foundation trust in respect of goods and services provided by the foundation trust directly to patients other than for the purposes of the NHS [emphasis added].'