Northumbria Healthcare NHS Foundation Trust v The Commissioners for His Majesty’s Revenue and Customs

The question of whether a public body provides goods and services “as a public authority” for the purposes of the first paragraph of Article 13(1) PVD (and its predecessors) has been considered extensively in the case-law of the Court of Justice of the European Union (CJEU), which is considered in some detail in the Chelmsford case at §§24–48, and we do not repeat that here. In particular, in light of the approach developed by the CJEU in Joined Cases C-231/87 and C-12/88 Carpaneto Piacentino [1989] ECR 3233, Case C-446/98 Fazenda Pública v Câmera Municipal do Porto [2001] STC 560, Case C-288/07 HMRC v Isle of Wight Council [2008] STC 2964 and Case C-554/07 Commission v Ireland EU:C:2009:464, we gratefully adopt the following propositions summarised at §49 of the Chelmsford decision, with some expansion on our part:

In relation to these propositions, and in particular proposition (5), it is helpful to make some further observations.

First, the concept of a “special legal regime” derives from Carpaneto Piacentino. Referring to what was then Article 4(5) of the Sixth VAT Directive and is now Article 13(1) PVD, the CJEU said:

The CJEU did not in that case expand upon what was meant by a “special legal regime” applicable to public authorities. In subsequent cases, however, the CJEU said that an activity will be regarded as having been carried on under a special legal regime “where the pursuit of the activity involves the use of public powers” (Fazenda Pública, §§21–24) or where the activity is “closely linked to the exercise of rights and powers of public authority” (Isle of Wight, §31):

The CJEU indicated that public powers of that nature were not engaged in Case C-604/19 Gmina Wroclaw EU:C:2021:132. This case is not retained EU law (as the Upper Tribunal noted in Chelmsford, §45), but it is illustrative. It concerned the transformation of leasehold rights under a perpetual usufruct into ownership rights, in return for the payment of a fee to the relevant municipality. The CJEU noted that what was decisive was the manner in which the activities in issue were carried out (§78), and considered that the fee payable in such a case was not fixed “in an administrative procedure as a public authority under a special public law regime” (§84). The mere existence of a particular power given to the public authority was not, therefore, without more sufficient to give rise to a special legal regime. By contrast, in Fazenda Pública, the CJEU held that the fact that the letting of car parking spaces involved the use of public powers, such as authorising or restricting parking on a public highway or imposing a fine for exceeding the authorised parking time, showed that the activity was subject to a public law regime (§22).

In Chelmsford HMRC contended that the CJEU jurisprudence indicated that a special legal regime arose only where the activity involved the use of what were described as “sovereign” powers pursuant to which a local authority specifically exercises the activity, namely powers providing for the making of rules or the imposition of fines (see §§19 and 50 of the decision). The Upper Tribunal rejected that argument, following an extensive discussion of the cases relied on by HMRC (§§50–72). We note that Mr Watkinson, for HMRC, did not pursue that argument in these proceedings. As the Upper Tribunal discussed in Chelmsford, while the use of public powers such as the imposition of fines will undoubtedly indicate that the activity is subject to a public law regime (as in Fazenda Pública), the case-law has not laid down a hard-edged test requiring the use of “sovereign” powers.

What is apparent, however, is that the tribunal should have regard to the way in which the activities are carried out by the public authority. In particular, what identifies an activity as being pursued “as a public authority”, for the purposes of the derogation under Article 13(1), is the fact that the activity either involves or is “closely linked to” the exercise of rights and powers of public authority, thus distinguishing the public body from the situation of a private economic operator carrying out similar activities. That analysis is consistent with the approach of the Upper Tribunal in Chelmsford at §31, 37, 39 and 107.

Secondly, in Commission v Ireland the CJEU rejected the argument that local authorities in Ireland could be exempt simply on the basis that they acted pursuant to overarching powers conferred on them by statute (in particular the Constitution of Ireland and the provisions of the Local Government Act 2001). Concluding that Irish law in respect of VAT did not comply with the PVD, the CJEU commented at §49 that:

The distinction between the exercise of general statutory powers and those that are specific to the activity in issue was recognised by the Upper Tribunal (Warren J) in R (Durham Company) v HMRC [2016] UKUT 417 (TCC) at §§70 and 106. The point was succinctly made by Patten J as he then was in West Devon BC v HMRC [2001] EWHC 2202 (Ch) at §15:

It is clear, therefore, that the mere fact that the public authority is in general terms required to act in accordance with statutory powers is not sufficient. Rather, it is necessary to show that the pursuit of the specific activities in question involves or is closely linked to the exercise of rights and powers of the public authority.

That distinction is reflected in the reasoning of the Upper Tribunal in Chelmsford, where the question was the application of Article 13(1) PVD to the provision of leisure facilities by the local authority. The Upper Tribunal upheld the FTT’s decision that the services were provided under a special legal regime, on the basis that the authority’s decisions on pricing, location and scope of facilities were impacted by “intersecting statutory obligations” (§103). Those obligations constrained the exercise of the authority’s powers by requiring the making of numerous decisions as to the manner and way in which the facilities were to be run, including decisions as to how best to achieve objectives to which Chelmsford was required to have regard by reason of other statutory obligations to which it was subject (§106). The Upper Tribunal therefore considered that the activities engaged in by Chelmsford were closely linked to the exercise of the rights and powers of a public authority (§107).

Thirdly, the Upper Tribunal made clear in Chelmsford that the powers of a local authority will not be transformed into a special legal regime simply because the authority has set itself conditions in policy and strategy documents. As the Upper Tribunal recorded, there was no dispute that the legal test only permits national law requirements to be taken into account in identifying whether there is a special legal regime for the purposes of Article 13(1). If the FTT had relied on the policy documents purely by virtue of their status as policy, that would therefore have been an error (§90). The Upper Tribunal did not, however, consider that the FTT had done so. Rather, the FTT had relied on the policy documents as an expression of the relevant national legal requirements operating on Chelmsford, which were comprised of intersecting statutory obligations (§§97–103).

The FTT’s reasoning in Chelmsford was thus that “in providing its services, the authority was (through the policies which in turn derived from legal obligations) subject to different requirements when deciding what services to provide, at what price, where to provide them and to whom, by comparison with a private sector operator” (§103). The FTT did not, therefore, err in its approach.

At §104 the Upper Tribunal added that even if the FTT had erred, either in relying solely on Chelmsford’s policies without considering the need for the obligations to stem from national law, or in not explicitly linking the material parts of the policies back to national law, neither error would result in a different outcome, since if the Upper Tribunal were to set aside the decision and remake it, there would be “sufficient elements deriving from national law reflected in the policies” to reach the same result – specifically the “best value obligation, the fiduciary obligations and the other statutory obligations to which we have referred (the obligations under s17 Crime and Disorder 1998 Act, s11 Children Act 2004 and s4 Local Government Act 2000)”.

It is not disputed that the Trust was established by and takes its powers from the National Health Service Act 2006. Before the FTT, the Trust contended that this Act amounted to a special legal regime. However, the substance of Mr Firth’s argument at the hearing before us did not rely on that Act. Instead Mr Firth submitted that where a local authority is bound to take into account and act upon external guidance in carrying out the activity, then it will be carrying out that activity pursuant to a special legal regime. That is because it will be subject to public law obligations (enforceable by way of judicial review) to follow the guidance or only to depart from the guidance for good reason: see for example R (Somerset County Council) v S of S for Education [2020] EWHC 1675 (Admin).

Mr Firth said that the FTT was therefore wrong to find that the guidance issued to the Trust by the NHS and the Department of Health was not a special legal regime. In oral submissions he relied, in particular, on the decision of the FTT in Chelmsford, which he interpreted as establishing a special legal regime on the basis of the objectives set out in Chelmsford’s own policy documents. At one stage, Mr Firth argued that the Trust was also required to comply with the guidance pursuant to the terms of its NHS contract, however he did not pursue that submission.

In his post-hearing written submissions, in light of the approach taken by the Upper Tribunal in Chelmsford, Mr Firth emphasised that the guidance relied upon in this case was external rather than policy set by the Trust itself. He also sought to introduce a new argument (not raised in the Trust’s grounds of appeal or at the hearing before us) that the Trust was subject to a series of statutory constraints derived from the NHS Act 2006, the Equality Act 2010, the Care Act 2014 and the Children Act 2004. On that basis, he said, the Trust was in an equivalent position to that of Chelmsford, such that the reasoning of the Upper Tribunal in that case applied equally in the present case.

We will address separately Mr Firth’s arguments on the guidance and the new arguments on statutory constraints.

Mr Firth pointed to the fact that the car parking guidance which we have set out at §§12–15 above is given in mandatory terms and requires the Trust to provide concessions for certain categories of visitors, to make the charges reasonable for the area, and to ensure that income generation does not interfere to a significant degree with the provision of NHS core services. In the circumstances, he submitted that the guidance establishes public law obligations on the Trust which do not apply to private operators.

Mr Firth sought to rely on two main propositions said to apply in considering whether a public authority is engaged in activities as a public authority. His first proposition was that what matters is whether the public authority is governed only by the ordinary rules of private law in respect of the activity.

In support of that proposition, Mr Firth relied heavily on the judgment of the Court of Session (Inner House) in Edinburgh Telford College v HM Revenue & Customs [2006] CSIH 13. In that case the Court of Session was concerned with whether a college was a taxable person in respect of the provision of further education courses, grant funded by the Scottish Education Funding Council. The college provided courses pursuant to the Further and Higher Education (Scotland) Act 1992. At §25 the Court said that:

Mr Watkinson submitted that Edinburgh Telford College was not authority for a test of whether the activity was governed solely by rules of private law.

We agree with Mr Watkinson. It is in the nature of a public authority that its activities will be governed to a greater or lesser extent by both public law and private law. The Court of Session was not saying that a particular activity would be engaged in as a public authority if the activity was governed to some extent by public law. Quite the opposite: what the Court of Session went on to say at §25 (immediately following the extract cited above) was that:

Its conclusion was thus based on a finding that the activity of the College was governed “to a significant extent” by public law. That is consistent with the position which (as discussed above) has emerged from the jurisprudence of the CJEU, including case-law post-dating the Edinburgh Telford College judgment, which requires the tribunal to consider whether the way in which the activity is carried out involves or is closely linked to the exercise of rights and powers of public authority.

Mr Firth’s second proposition was originally formulated on the basis that a special legal regime would arise where there was a “legal framework” which impacts on the way in which the service is provided, and which does not apply to private operators. He interpreted this as being the case where a public authority is bound by its own guidance or bound to take into account external guidance that does not apply to private traders. Mr Firth reformulated this proposition in his post-hearing submissions, to say that the key question is whether the “legal conditions” under which the public authority carries on the activity are different from the legal conditions to which a private sector operator providing the same service would be subject.

Mr Firth’s starting point in this regard was a submission that we could and should give a wide interpretation to the first paragraph of Article 13(1) when considering whether public authorities are engaging in activities “as public authorities”. It should, he said, come as no surprise that public authorities often engage in activities as a public authority. He submitted that a broad interpretation would still be meaningful because not every activity which a public authority engages in is subject to public law principles.

The relevant legal conditions to which a public authority is subject should not therefore, in Mr Firth’s submission, be limited to conditions deriving from statute law, but should encompass public law duties to follow guidance, and to depart from guidance or policy requirements only for good and properly articulated reasons. He pointed out that in Chelmsford the Upper Tribunal included not only statutory obligations but also fiduciary obligations to ratepayers derived from case-law in its description of the obligations that applied to Chelmsford but not to private sector operators.

Mr Firth submitted that disregarding the way in which legal conditions arise, in this case by virtue of public administrative law, would be unprincipled. The way in which the legal obligation arises should not affect the operation of Article 13(1). For example, unlike the UK, some member states have a written constitution. The fact that an obligation derives from common law and not from statute or by reference to a written constitution should not be relevant. In that context we were referred to the observations of the Supreme Court in R (Miller) v The Prime Minister [2019] UKSC 41, §§39–40 for the proposition that whilst the UK does not have a written constitution it does possess a constitution that is not confined to statutory rules, but includes constitutional principles developed by the common law.

Mr Watkinson submitted that insofar as policies are relied on as part of the basis of an asserted special legal regime, it follows from Chelmsford that there must be “sufficient elements deriving from national law” reflected in those policies for them to have a place in the analysis. In that regard, it is not sufficient that the public authority is subject to a generic public law obligation to follow guidance. Rather, it is necessary to identify with precision the specific provisions of national law that give rise to the special legal regime. He noted that insofar as Chelmsford referred to fiduciary duties, those were imported by the FTT as part of the identified statutory constraint in s. 19 Local Government (Miscellaneous Provisions) Act 1976 (§59 of the FTT decision), and likewise regarded by the Upper Tribunal as part of the matrix of statutory obligations to which Chelmsford was subject, hence the reference in §104 of the decision to the “best value obligation, the fiduciary obligation and the other statutory obligations to which we have referred”.

We accept Mr Watkinson’s submissions on this point. As Mr Watkinson pointed out, ordinary principles of public law will apply to any body governed by public law. It is difficult to envisage any public body supplying goods or services which would not be subject to at least some public law obligations. If Mr Firth were correct then all or almost all the activities of a public authority would be carried on pursuant to a special legal regime, and the requirement in Article 13(1) for the public authority to be acting as a public authority would be deprived of any meaningful effect. The CJEU has, moreover, emphasised that the first paragraph of Article 13(1), being a derogation, should be interpreted strictly.

It seems to us that Mr Firth’s submissions were very close to the approach that was conspicuously rejected in Commission v Ireland. If the fact that a public body acts in accordance with powers conferred on it by statute is insufficient to establish that its activities involve or are closely linked to the exercise of rights and powers by a public authority, the same must also be true of the fact that the public authority is subject to general principles of public and administrative law, including the general duty to follow guidance.

We see no meaningful distinction in that regard between guidance drawn up by the public body itself, and external guidance. The point remains the same, that the general public law obligation to follow guidance does not amount to a “condition laid down by national law” for the pursuit of the activity at issue, to determine whether that activity is being engaged in under a special legal regime, to use the wording of Fazenda Pública, §21.

We do not rule out that, in an appropriate case, a specific obligation imposed on a public body by case-law (as opposed to a statutory obligation) might either in itself or alongside other obligations establish that the activity either involves or is closely linked to the exercise of rights and powers by a public authority, so as to give rise to a special legal regime. But the public law principle requiring public bodies to have regard to guidance, and to follow it unless there are clear reasons for departing from it, does not impose any such specific legal obligation. Nothing in that general principle distinguishes the activity under scrutiny – in this case the provision of car parking facilities – from any other activity of the public authority, or shows that the pursuit of that specific activity involves or is linked to the exercise of rights and powers of public authority.

Mr Firth’s alternative argument, introduced in his written submissions following the decision in Chelmsford, was that the statutory constraints referred to in that case were similar to the statutory constraints that apply to the Trust in the present case. Even if, therefore, it was necessary to identify a special legal regime on the basis of something more than general public law principles, he said that the statutory constraints upon the Trust in the present case gave rise to a special legal regime. Specifically, he referred to:

Mr Watkinson objected that the Trust’s case on statutory constraints was a change of case for which no application had been made. It was not within the scope of the grounds of appeal, nor was it advanced at the hearing. At an early stage of the proceedings before the FTT, HMRC specifically requested particulars of the precise statutory basis on which the Trust asserted a special legal regime. The Trust simply identified s. 9 of the NHS Act 2006, under which the Trust is authorised to engage in an NHS contract. On appeal, however, even that limited point had not been pursued by the Trust. Instead Mr Firth had forcefully argued, in submissions recorded and addressed above, that it should not be necessary to identify any specific statutory provisions in order to establish a special legal regime. Moreover, no mention had been made of the Equality Act, the Care Act or the Children Act at any stage of the proceedings before now.

We consider those objections to be well founded. It is well-established that an appellate court will be cautious about allowing a new point to be raised on appeal that was not raised before the first instance court: see e.g. Singh v Dass [2019] EWCA Civ 360, §§15–18, and Sivier v Riley [2021] EWCA Civ 713, §18. The Trust has now had two bites of the cherry, in its appeal to the FTT and its further appeal to this Tribunal. The argument now formulated as to statutory constraints arising from the provisions set out above has not appeared at any point of the proceedings before now. There has therefore not been any investigation – nor indeed has there been any evidence – as to the manner and extent to which the Trust is in practice constrained in its decision-making by the statutory provisions now relied upon.

Mr Firth argued that the Trust should not be criticised for failing to anticipate the decision in Chelmsford, and that the Trust was simply seeking to apply that decision to its own circumstances. He submitted that it was not necessary to consider evidence on the impact of the statutory obligation; rather, he said it was simply a matter of objective interpretation whether the guidance relied upon in a given case reflects the statutory obligations.

We disagree. The Upper Tribunal made clear in Chelmsford that the decision of the FTT was based on the detailed evidence before it as to how the statutory obligations constrained Chelmsford’s powers and decision-making. The Upper Tribunal in turn repeatedly emphasised that evidence in its judgment: see e.g. §§75, 79, 80, 94–95, 97, 100, 102–103 and 106. While it appears that some of the statutory provisions relied upon before the Upper Tribunal may not have been highlighted to the FTT (as noted at §101 of Chelmsford), the Upper Tribunal explained that the evidence before the FTT, and the FTT’s findings on that evidence, did nevertheless address the way in which Chelmsford “necessarily took account” of the obligations in question (§102). It does not appear that there was any such evidence before the FTT in the present case.

Mr Firth is therefore not simply advancing a new legal argument in light of Chelmsford; rather he is attempting to introduce an argument which has no foundation whatsoever in the evidence. In our judgment, it is far too late to do so and in the circumstances it would not be fair on HMRC to permit the Trust to do so. Without evidence on the matter we cannot properly reach any conclusions as to the manner and extent to which the obligations are reflected in the guidance or the decision-making of the Trust in its provision of car parking facilities, so as to inform our analysis of whether the Trust is in that regard acting under a special legal regime that is not applicable to private economic operators.

For the reasons given above, the Trust has not established any error of law by the FTT in finding that the Trust did not provide car parking under a special legal regime.

The second ground of appeal is that the FTT erred in law in concluding that treating the Trust as non-taxable would lead to a significant distortion of competition. This ground arises only if we are wrong in our conclusion on the first ground. The submissions we have received on this ground go well beyond the submissions made to the FTT. In those circumstances we set out our conclusions on the issues with some diffidence, as they do not form part of our primary reasons for dismissing the appeal.

The Trust makes the following criticisms of the FTT’s conclusion that, if the Trust is a non-taxable person, there would be a significant distortion of competition:

The way in which the grounds of appeal are expressed suggest a challenge to the FTT’s findings of fact. Mr Firth emphasised that, save in relation to the last of those criticisms, the challenge was to the test which the FTT applied in reaching its conclusions on whether there was a significant distortion of competition. In relation to the last criticism, this was essentially a challenge based on Edwards v Bairstow [1956] AC 14.

It is common ground that HMRC bears the burden of proving that if the Trust is treated as a non-taxable person then this would lead to a significant distortion of competition. The following further propositions derived from the CJEU case-law were also common ground:

It is also clear from the CJEU’s case-law that:

Proposition (5) was also noted by the Upper Tribunal in the Mid-Ulster decision, in a passage drawn to our attention by HMRC (see §43, and also §§51–52 of the decision).

It is in the light of these propositions that we will consider the Trust’s various criticisms of the Decision under Ground 2.

It follows from proposition (1) at §72 above that we are not specifically concerned with competition between the Trust and private car park operators in Northumberland and North Tyneside. Rather, we are concerned with NHS trusts generally and the national market in the UK, or at least in England.

At §64 of the Decision (cited above) the FTT found that there was actual competition between the Trust’s car parks and parking provided by private operators. That finding was based on various facts found by the FTT included in our summary above. On the basis of those facts the FTT had already concluded (in the context of whether the Trust’s supplies were an economic activity) that there was actual competition between the Trust and private car park operators:

Mr Firth submitted that the FTT’s findings of fact ought to have led the FTT to find instead that the Trust was not in actual or potential competition with private car park operators. His principal submission was that opportunities for competition were limited, and where they did arise, the Trust was required by guidance to take steps to avoid competition. He submitted that this was the very opposite of competition. Further, the FTT failed to appreciate that the mere presence of private operators in a market does not demonstrate the existence of either actual or potential competition. In particular, the FTT did not consider whether the restrictions on how the Trust was required to operate prevented it from being in competition with private operators.

We do not know whether the FTT was invited to find that there was no actual competition on the basis that the Trust was required to take steps to avoid competition. It is unlikely that it was, because there is no discussion of the point by the FTT. However, as a matter of principle it does not seem to us that the existence of guidance pursuant to which a public authority may take steps to avoid competition can negate the existence of actual or potential competition. Quite simply, the guidance may or may not be followed, and whatever steps are taken may or may not be effective in precluding a situation of competition with other facilities.

In circumstances where the guidance itself acknowledges the existence of competition with private operators, we consider that the FTT was entitled to approach the question of actual competition in the way it did. The FTT’s conclusion was supported by the evidence to which it had referred at §41. We do not consider that the FTT made any error of law in finding actual competition between the Trust’s car parks and parking provided by private operators in or near those areas.

At §§65–66 of the Decision (also cited above) the FTT found that treating the Trust as a non-taxable person would lead to a significant distortion of competition.

Mr Firth said that in reaching that conclusion the FTT applied the wrong test or misapplied the test. In particular, Mr Firth submitted that:

Mr Watkinson did not accept that the test described by Mr Firth was an exhaustive test to be applied to determine whether there was a distortion of competition for the purposes of the second paragraph of Article 13(1). He submitted that the FTT did not err when it said that lower charges “might” occur, and that the Trust “could” undercut commercial operators. All that was required was the possibility of a significant distortion of competition.

To address these points it is necessary to consider, in addition to the propositions that we have set out at §§72–73 above, the analysis in the domestic Isle of Wight cases following the judgment of the CJEU, on which Mr Firth placed particular reliance.

The starting point is that when the case returned to the High Court, following the preliminary ruling of the CJEU, HMRC made a submission that the local authorities’ appeals should be dismissed on the basis of a presumption, where the activity was more than negligible, that the differential tax treatment of supplies of off-street parking by local authorities and commercial operators would lead to distortions of competition. Rimer LJ rejected that proposition, finding that the inquiry into distortions of competition required a factual investigation, not the application of a presumption. He therefore remitted the case to the FTT to be considered on the evidence: [2009] EWHC 586 (Ch).

There was then an interlocutory hearing before the FTT at which HMRC again contended that once it was established that there was more than negligible competition between public and private providers of a given service, non-taxation of the public body was “conclusively presumed” to distort competition. On that basis, HMRC submitted that the only evidence required for the purposes of the enquiry mandated by the CJEU judgment was evidence of the scale of provision of off-street parking nationwide, evidence of the degree to which that was provided by local authorities, and evidence at a “high level of abstraction” of the existence of actual or potential competition by private operators. The appellant local authorities by contrast contended that non-taxation would not lead local authorities to behave differently as regards their pricing, and that motorists were not sufficiently price-sensitive for commercial operators to be affected in any event.

The FTT gave the appellants permission to adduce evidence on the points on which they relied, concluding on the basis of Rimer LJ’s decision that the appellants were plainly entitled to adduce the evidence that they sought. The FTT also noted that in any event the CJEU judgment did not support the proposition that non-taxation was irrebuttably presumed to distort competition: [2010] UKFTT 264 (TC). On that basis, considerable evidence (including expert evidence) was adduced by both the local authorities and HMRC.

The FTT’s substantive decision following the remittal was given in Isle of Wight Council v HMRC [2012] UKFTT 648 (TC). At the outset, the FTT considered the argument by counsel for HMRC yet again that there was a presumption that where there was actual competition, differential taxation would lead to distortion, relying in particular on a new decision of the CJEU in C-259/10 Rank v HMRC EU:C:2011:719. The FTT again rejected that proposition as a presumption of law, but considered that it would be likely that, as a matter of fact, differential tax treatment of similar offerings would distort competition in any market:

The FTT went on to say:

The FTT went on to review, in considerable detail, the evidence before it as to the decision-making of local authorities and the consequences of those decisions, concluding that the evidence established (contrary to the contentions of the appellant local authorities) that there would be a non-negligible distortion of competition. In particular, the FTT reasoned that taking into account upward and downward pressures on parking charges, local authorities would lower prices if VAT was not chargeable; this would lead to correspondingly lower prices for commercial operators; and that the effect on prices would be a reduction of at least 7.5% which was not negligible.

On appeal to the Upper Tribunal (Isle of Wight Council v HMRC [2014] UKUT 446 (TCC)) the Upper Tribunal noted that:

At §12, the Upper Tribunal cited §75 of the FTT’s judgment, noting that neither party had disagreed with “that formulation of the question, with the FTT’s statement of the proper approach, or with its description of the question as one of fact.” The Upper Tribunal repeated at §53 that the parties had rightly accepted that the FTT had identified and applied the correct test and the correct approach to that test. The question was therefore whether the FTT had erred in its understanding of the way in which local authority decision-making was undertaken. Following a discussion of the evidence before the FTT, the Upper Tribunal ultimately concluded that there was no error in the FTT’s analysis of that evidence (§57).

That decision was appealed to the Court of Appeal (Isle of Wight Council v HMRC [2015] EWCA Civ 1303). Given the position taken in the Upper Tribunal, the question of whether there was a presumption of law was not in issue. Rather, the Court of Appeal noted at §15 that the question was one of fact. As to the legal test, the Chancellor found that:

The Court upheld both of those conclusions. The Chancellor’s judgment continued:

There is no doubt that the situation described by the FTT at §72 of its decision in Isle of Wight, and relied upon by Mr Firth, is one in which a distortion of competition would arise, as the Chancellor made clear at §76. It would, however, be wrong to describe that as an exhaustive test as to what amounts to distortion of competition: indeed the FTT made clear at §72 that it was not necessary specifically to define the meaning of that expression.

Mr Firth contended that the Upper Tribunal had endorsed his “test” when it said at §53 that “the FTT identified the correct test and the correct approach to that test”. That is a misreading of the Upper Tribunal’s decision. The only “test” referred to by the Upper Tribunal was at §12 where it referred to §75 of the FTT’s decision. §72 of the FTT’s decision was not mentioned in the decision of the Upper Tribunal, or indeed in the judgment of the Court of Appeal. Mr Firth also contended that the §72 “test” for distortion was the premise of the Court of Appeal’s judgment, relying on §§63–4. We do not read those paragraphs in that way. All that the Court of Appeal was saying was that the focus was on the factual findings of the FTT, and that the FTT had concluded that charges would have been lower if VAT had not been imposed on the local authorities.

In so far as the Isle of Wight series of cases established any test for a distortion of competition, the key point of principle is that there is no irrebuttable presumption of law to the effect that differential taxation of public bodies and private operators will distort competition between them, once actual or potential competition has been established. Rather, it is a matter of fact in every case, albeit that it is likely (as a matter of fact) that differential taxation will have that effect. The public body and HMRC are therefore in principle entitled to adduce evidence directed at showing whether, on the particular facts of the case, distortion would occur.

We therefore reject Mr Firth’s submissions as to the “test” for a distortion of competition to be derived from this line of cases.

Equally, however, we do not consider that the case-law supports Mr Watkinson’s contention that a mere “possibility” of a distortion of competition is sufficient. Mr Watkinson relied on the statement of the principle originally set out in Carpaneto at §24:

The CJEU was specifically asked, in the second question referred in Isle of Wight, what degree of probability or level of certainty is required by the expression “would lead to”. The UK government submitted that “would” was interchangeable with “could” in this context, relying on Carpaneto. The CJEU did not answer that question, confining its answer instead to the question of whether potential competition was sufficient or whether actual competition was required. Conspicuously, however, it did not repeat the Carpaneto formulation of “could lead to”; on the contrary, at §53 it expressly referred to “the significant distortions of competition, to which the treatment as non-taxable persons of bodies governed by public law acting as public authorities would lead”. That language was repeated in subsequent cases, e.g. Case C-79/09 Commission v Netherlands EU:C:2010:171, §91; Saudaçor §74; and National Roads Authority, §41.

The point was put even more clearly at §43 of National Roads Authority:

The highest that Mr Watkinson was able to put his case on this point was by reference to a comment of Advocate General Colomer in his opinion in Case C-246/08 Commission v Finland, §73, that “it is sufficient that there is a glimpse of a future distortion of competition.” It is clear from the context, however, that the Advocate General was referring to the principle established by Isle of Wight that the distortion of competition required will encompass not only actual competition, but also potential competition, provided that it is real and not purely hypothetical. In any event the CJEU did not adopt the Advocate General’s formulation in its judgment in Commission v Finland (EU:C:2009:671); nor has that formulation been adopted in any subsequent judgment to which we have been referred.

The relevant question is therefore whether the different treatment of the activity for VAT purposes would lead to a significant distortion of competition, including a distortion of potential competition provided that there is a real and not hypothetical possibility of market entry by a private operator.

That is the test which the FTT adopted in the present case. It concluded, at §§65–66, that treating the Trust as a non-taxable person would lead to a significant distortion of competition. The supporting discussion in §65 of the different ways in which the Trust might react if the supply was not subject to VAT (i.e. by introducing lower charges or simply retaining the additional income) did not turn on any different test. On the contrary, the FTT’s point was that in either case there “would” be a distortion of competition. In our view, the FTT did not err in the test that it adopted.

Mr Firth’s second submission set out at §82 above was a criticism of the FTT’s conclusion that if the Trust simply took the additional income without lowering its charges, that would distort competition. Mr Firth argued that the fact that the Trust might earn a higher profit cannot in itself amount to a distortion of competition. Something more is needed, he said, such as evidence that higher profits would lead to expansion of the activity, to the disadvantage of private operators.

We do not accept that criticism. The consistent approach taken by the CJEU to the question of whether a distortion of competition arises in the VAT context is that where two identical or similar supplies which meet the same needs are treated differently for the purpose of VAT, that gives rise, as a general rule, to a distortion of competition: Rank, §35. The FTT endorsed that proposition at §61 in its decision in Isle of Wight, cited above, albeit emphasising that this was a proposition of fact rather than a presumption of law. The Upper Tribunal in Isle of Wight made no criticism of the FTT in that regard, and we respectfully agree with the approach taken by the FTT in that case.

Put another way, the disadvantage to private operators does not depend on the decision taken by the public body as to the way in which it will reflect the fiscal advantage in its pricing. Rather, the disadvantage flows from the fact of the differential treatment of identical or similar activities meeting the same needs. That disadvantage cannot be excluded where the public body chooses to maintain its pricing but retain a higher profit from that: we agree with the FTT that the ability of a public body to make a greater profit from the relevant activity by comparison with the competing private operator, as a result of differential fiscal treatment, will in principle produce a distortion of competition. This does not amount to “an impossible test” as suggested by Mr Firth. It is open to a public authority to adduce evidence that there is in fact no distortion of competition in the circumstances of a particular case.

Moreover, if one were to read into the test a requirement to carry out an inquiry into the consequences, in terms of the decision-making of the public body, of the fiscal advantage obtained by treatment as a non-taxable person, that would run plainly counter to the requirement of legal certainty emphasised by the CJEU in Isle of Wight (§§47–58), because it would render the taxation of public bodies under Article 13 dependent on decisions that might vary from time to time. The CJEU in Isle of Wight concluded, in that regard, that the principle of legal certainty precluded an assessment based on the conditions of competition on local markets, giving rise to disputes following any change in those conditions of competition. Even greater uncertainty would result from an assessment based on the decision-making of public bodies, which could change at will at any time.

We also note the repeated emphasis in the case-law on an evaluation by reference to the “activity” in question, without that activity relating to any particular local market: see proposition (1) at §72 above. As the FTT noted at §74 of its decision in Isle of Wight, that involves looking at the issues at a fairly high degree of abstraction, rather than conducting a detailed competition investigation of the sort that might be embarked upon by the competition authorities. There is no suggestion in the case-law of the CJEU that the application of the second paragraph of Article 13(1) requires an assessment of the future decisions that might be taken by a public body as a consequence of the non-imposition of VAT, and in particular a determination of whether those decisions are likely to involve the setting of lower charges rather than the retention of profits to be used for the provision of other services.

It is quite true that in the domestic Isle of Wight decisions there was considerable (and, at first instance, very detailed) discussion of the way in which the local authorities would have behaved in a situation of non-taxation. That was, however, because of the evidence before the FTT and the way in which the parties’ arguments had evolved, as we have set out above.

Those conclusions also answer Mr Firth’s third submission set out at §82 above, which we reject for the same reasons. In any event (and for completeness) we do not agree that the Trust is required to ensure that its charges were the same or higher than local car parks. The guidance that we have described at §13 above simply states that NHS sites that are close to city/town centres “may” need to ensure their car-parking charges are not lower than local car parks, to discourage commuters and others from using the NHS car parks. It provides no sufficient basis for a finding that there would be no distortion of competition.

We therefore reject Mr Firth’s three criticisms summarised at §82 above. We are satisfied that the FTT did not err in law when it concluded on the facts as found that there would be distortion of competition.

Mr Firth pointed to the detailed analysis by the FTT in Isle of Wight in reaching its conclusion that the distortion of competition in that case would be significant. It found that non-taxation of local authorities would depress pricing by at least 7.5%. Mr Firth submitted that there had been no such analysis in the present case, and that without considering what effect the distortion of competition would have, the finding at §65 of the Decision that the distortion of competition could not be described as negligible was unsupported.

We reject this submission for similar reasons to those set out above. While the CJEU case-law establishes that actual or potential distortions of competition must be more than negligible, that is to be assessed by reference to the activity in question and an analysis of the market. It does not require an assessment of the effect of non-taxation on the pricing decisions of the public bodies in question. While the FTT in Isle of Wight did reach conclusions on that point, as we have already explained that was because of the particular arguments and evidence before it.

The FTT was therefore not required to conduct the sort of assessment that the FTT in Isle of Wight embarked upon. The analysis at §65 was sufficient and there was no error in its approach.

The remaining question is whether the FTT’s conclusion is susceptible to an Edwards v Bairstow challenge, on the grounds that there was insufficient evidence to find a significant distortion of competition.

Mr Firth again relied on the approach taken in the Isle of Wight cases. Mr Watkinson submitted that the evidence before the FTT was sufficient for it to make its findings at §65 to the effect that there would be significant distortion of competition if the Trust was non-taxable.

It follows from our comments above that we do not regard the detailed factual and expert evidence before the FTT in Isle of Wight as epitomising the sort of evidence that is required to determine the existence of a distortion of competition for the purposes of the second paragraph of Article 13(1) PVD. That evidence was adduced as a consequence of the way in which the appellant local authorities put their case. But it is notable that the FTT’s starting point was that the CJEU in Isle of Wight did likely take it for granted that differential tax treatment would distort competition in the off-street car parking market, such that the FTT had “a considerable degree of confidence” in the proposition as a matter of fact that differential tax treatment of similar offerings would distort competition (§61). That passage of the FTT’s judgment was referred to by the Upper Tribunal, which proceeded on the assumption that that analysis was correct (§9 of the Upper Tribunal decision).

We agree with the comments of the Upper Tribunal in Loughborough Student’s Union v HMRC [2013] UKUT 0517 (TCC) in the context of an exemption from VAT for certain fund-raising events:

Contrary to Mr Firth’s submissions, we do not consider that this is inconsistent with the later ruling of the CJEU in National Roads Authority. That ruling made clear that it is necessary to consider the “economic circumstances” of the individual case. It is clear, however, from the judgment in that case that what was meant by this was, firstly, an evaluation of the “activity in question, as such” (§41), and secondly an evaluation of the facts, objective evidence and market analysis to support any conclusion on the existence of actual or potential competition (§42). It is for that reason that the CJEU said that potential competition could not be established on the basis of a “purely theoretical possibility” of market entry by a private operator.

The CJEU did not, however, suggest that it is necessary to carry out a granular analysis of the competitive conditions of the specific local market or markets on which public authorities are present, supported by factual and expert evidence, in order to establish the existence of a significant distortion of competition. Indeed any such proposition would have run counter to its emphasis at §41 that the existence of a significant distortion of competition “must be evaluated by reference to the activity in question, without that evaluation relating to any particular market”. As the FTT in Isle of Wight suggested, the required analysis is at a high level of abstraction.

Accordingly, we consider that the starting point was correctly set out at §64 of Loughborough Student’s Union. The existence of distortion can, of course, be rebutted on the facts of the individual case, as the Isle of Wight series of cases made clear. That is a fact sensitive analysis, and the evidence that may be relevant for that assessment will turn on the circumstances of the individual case.

In the present case, the FTT assessed the existence of a significant distortion of competition on the basis of the facts and matters set out in §§64–65 of the Decision. Having concluded (by reference to its earlier findings at §41) that there was actual competition between the Trust’s car parks and parking provided by private operators, the FTT went on to find that there would be a distortion of competition through the ability of the Trust to provide cheaper parking or the higher profit derived from that service. It considered that the amount of the potential difference in pricing or profit between parking provided by the Trust and that provided by commercial operators if VAT ceased to be chargeable could not be described as negligible.

We have already concluded above that the FTT did not err in its approach. As to the substance of its factual conclusions, we consider that those are clearly conclusions that the FTT was entitled to reach on the evidence before it, and cannot be impugned on appeal.

For the reasons given above, we dismiss the appeal on Ground 1. If necessary, we would also have dismissed the appeal on Ground 2.