Legislation governing how many private patients foundation trusts can take on can present challenges for trusts wishing to carry out more private work. Trevor Blythe explains the rules

Unlike NHS trusts, foundation trusts are limited in the amount of private patient work they can lawfully carry out. This restriction - the private charges cap - is contained in the legislation governing foundation trusts and was introduced to counter fears that they would lead to the privatisation of the NHS.

The cap has real teeth in that it forms part of each trust's authorisation from regulator Monitor, so an infringement is a breach of its authorisation. The cap is based on how much.of the trust's income came from private patient work compared with its total income in the financial year ending on 31 March 2003, or in the financial year immediately before it became a foundation trust if the trust was not in existence in 2003.

For instance, if the trust's private patient work in 2003 was 1 per cent of its total income, then that would be its private patient cap regardless of whether that figure went up or down in subsequent years. If a trust's total income rises once it has achieved foundation trust status, then the actual value of the private patient activity that can be carried out without breaching the cap may increase but the permitted ratio remains unchanged.

Interpreting the rules

The cap was controversial and, for some trusts at least, has proved inhibiting. Efforts have therefore been made to find ways to permit more private patient work to be carried out without breaching the cap. The wording of the relevant sections of the legislation is itself ambiguous. The key phrases - 'income derived from private charges' and 'charges imposed in respect of goods and services provided to private patients' - can be interpreted in more than one way.

This creates uncertainty, which can be a good thing, if one wants to adopt a more imaginative interpretation of the law, or a bad thing, particularly where a trust may be considering an innovative scheme but does not know whether it will breach its legal obligations. Trusts have therefore looked at inventing structures within which private patient work could be carried out and which, arguably at least, fall outside the critical wording in the legislation.

Monitor's Financial Reporting Manual 2006-07 gave guidance on the subject and, while it did not comment on specific models, it provided some clarification of Monitor's approach. Whether income would count towards the cap would very much depend on which UK accounting standard the trust was required to apply to it. If the arrangements had to be accounted for under the financial reporting standard 2 (FRS2) (subsidiaries), it would count towards the cap, while income from 'associate relationships, joint ventures and investments' (as defined by UK generally accepted accounting principles (UK GAAP)) would not.

Avoiding pitfalls

Faced with such clear guidance, trusts therefore concentrated more on finding structures in the latter category rather than engaging in semantic exercises which, if they failed, would inevitably land them firmly in the first.

However, if a particular transaction is challenged, it is ultimately a matter for the courts to decide whether income derived, directly or indirectly, from it should count towards the cap. In deciding this, and in resolving any ambiguities in the legislation, the courts can look at the relevant parliamentary debates at the time the act was passed to see what the legislative intention was. If a court decided that Parliament intended the words to be given the widest possible interpretation rather than a narrow, technical one, then this could cause problems for some existing schemes, which could, by implication, be found to be unlawful.

Trusts contemplating how private patient activity and income might be expanded beyond the cap would therefore be well advised to consider how, in the event of an adverse decision from the courts, they might extract themselves from existing deals. This apart, and given the disadvantages an arbitrary cap of this kind imposes on many trusts, perhaps Parliament should now find time to look again at this provision and either get rid of it altogether or give Monitor discretion over its application.

Trevor Blythe is a partner at Beachcroft LLP.