The High Court has granted interim relief in judicial review proceedings to restrain HMRC from implementing its decision to treat pathology services provided by the claimants as exempt supplies of medical care for VAT purposes (reversing a previous HMRC ruling). Although the Court’s approach to applications for interim relief would not usually consider the merits of the claim, the High Court did so in this case (in part because of substantial evidence and argument available to the Court), while recognising that the parties were at liberty to re-argue any issues and introduce new evidence should the case proceed to a full hearing.
The High Court concluded that the claimants had a legitimate expectation that the supplies of pathology services would be treated as taxable as HMRC had been given the full facts and advised of the significance of the ruling to the claimants’ business and HMRC had provided an unequivocal ruling. As there had been no change in the law (or any change in other material circumstances) since the ruling was given, the claimants were entitled to rely on that ruling unless and until a tribunal or court reached a substantive decision on the VAT treatment of the pathology services that supported HMRC’s new position.
On 1 February 2009, GSTS Pathology LLP (GSTS) was established by Serco Limited (SL) and an NHS trust as a joint venture to provide laboratory testing services to a group of hospitals (a year later, another NHS trust became a member). The joint venture was in line with a government instigated review of NHS pathology services that recommended that pathology services should be consolidated by creating “managed pathology networks”, replacing traditional operations under which each hospital carried out its own laboratory testing.
Work on the establishment of the joint venture began in 2007 and included advice on the best joint venture structure to adopt, taking into account the VAT position. The preferred joint venture vehicle was a limited liability partnership (LLP) under which most of its staff would be secondees rather than employees. As VAT would be charged on supplies of staff, staff costs representing a substantial overhead of the LLP, it was recognised that:
- The viability of this structure would be dependent on being able to deduct the VAT as input tax (since staff costs would not generate a VAT charge under existing arrangements). For this to be the case, the LLP’s supplies of pathology services would need to be taxable, rather than exempt, supplies.
- If VAT was properly chargeable on those supplies, the LLP’s customers (the NHS trust members of the LLP) would be able to deduct the VAT charged on those pathology services because they fell within the scope of “laboratory services” specified in the HM Treasury direction. As such, the NHS trusts, as government bodies, would be able to obtain repayment of the VAT charged.
Under the proposed structure, the LLP’s services would consist of laboratory testing and the provision of laboratory test reports to NHS trusts members. The LLP would not have any direct contact with patients, undertake diagnosis, or make any decisions about patient care or treatment. Given the importance of VAT to the success of the joint venture in May 2008, the founding NHS trust (through its accountants) applied to HMRC for a ruling on a number of issues concerning the VAT treatment of the joint venture arrangements, including confirmation that the supplies of pathology services would be taxable supplies. The application, which made it clear that certainty of VAT treatment was required before the NHS trust contracted with SL, fully set out the background to the proposed joint venture arrangements. There was no suggestion that HMRC had not been provided with the full facts.
On 28 May 2008, HMRC replied to the accountants and, among other things, confirmed that they accepted that the pathology services to be undertaken by the LLP would not be “for the primary purpose of protection, maintenance or restoration of the health of the person concerned but to provide a third party with the necessary element for taking a decision” and would, therefore, be taxable supplies.
In December 2008, in reliance on HMRC’s ruling, contracts establishing the joint venture arrangements were entered into.
On 29 April 2010, in anticipation of the other NHS trust becoming a member of GSTS, HMRC re-affirmed its 2008 VAT ruling on the assumption that there was no change to the nature of the supplies to be made by GSTS. The VAT ruling was further confirmed by HMRC’s NHS Compliance Team in a letter to the advisers for the new NHS trust member.
However, on 17 January 2013, HMRC wrote to GSTS stating that HMRC’s VAT policy secretary had been asked to give a definitive view on the VAT liability of the pathology services.
In its letter, HMRC stated that analysing samples relating to specific patients using a variety of health professionals is a far more complex service than just providing information. This analysis provides an essential component needed to make a diagnosis. Therefore, those services constituted medical care and were exempt. Further, in HMRC’s view, pathology services played a vital role in “the protection, maintenance or restoration of the health”, meaning that they would qualify for exempt medical care.
On 15 February 2013, GSTS filed a notice of appeal against HMRC’s decision with the First-tier Tribunal (FTT). However, as even an expedited appeal would not have resulted in a tribunal decision before September 2013, on 22 March 2013, GSTS, SL and the two NHS trusts applied to the High Court for an interim injunction preventing HMRC from implementing its decision to treat supplies of pathology services by GSTS as exempt from 1 May 2013.
The High Court granted the claimants’ application for interim relief. On the basis of the evidence and considering the merits of the claim, the court concluded that it would not be a just or proportionate exercise of power for HMRC to implement its decision before the tribunal appeal was determined and that the claimants’ application for an injunction should be granted.
The grounds of the judicial review claim were that the claimants had a legitimate expectation that GSTS’ supplies of pathology services would be treated as taxable. Further, that legitimate expectation extended to all past supplies and to future supplies, at least until the VAT appeal had been finally determined and, if the appeal was unsuccessful, until after a further reasonable period had elapsed.
The parties agreed that the judicial review claim should not proceed until determination of the VAT appeal (since, if GSTS succeeded, the judicial review claim would fall away). However, for the purposes of reaching a decision on whether to grant an interim injunction, the High Court opted to consider the merits in more depth (in part because of the substantial body of evidence with few, if any, disputed matters of fact), but acknowledged the parties’ rights to adduce further evidence and re-argue points of law or fact at a final hearing.
In the view of the High Court:
- Although the decision in L.u.P. GmbH v Finanzamt Bochum-Mitte11 provided a substantial argument that carrying out laboratory tests ordered by a medical practitioner constituted the provision of medical care, it was arguable that the ECJ decided only that if medical tests have a therapeutic purpose they may constitute medical care and that a prophylactic purpose is, in principle, sufficient to satisfy this, but it remained a question of fact for the national court to determine what the principal purpose of a particular medical testing service was and to distinguish between a therapeutic purpose (which may be prophylactic) and a purpose that was not itself therapeutic.
- It was reasonable to infer from HMRC Notice 701/31 that HMRC did not view L.u.P. as bringing about a change in the law (as interpreted by HMRC in that Notice). Indeed, the 2010 VAT ruling and HMRC’s NHS Compliance Team’s confirmation supported this. Further, HMRC’s 2013 letter recording its decision to apply exemption from 1 May 2013 indicated the uncertain state of the law and did not suggest that any development in the law had taken place.
- In light of the 2008 and 2010 rulings, it was clear that the claimants had an expectation that GSTS’s supplies would be treated as taxable. Further, the two conditions enunciated in R v IRC ex p MFK Underwriting Agencies Limited 12, were met. In particular, there was no suggestion that the claimants had withheld information and the ruling was unqualified and unambiguous.
- The claimants clearly relied on the rulings, which was a reasonable thing to have done. Although the advisers’ advice may not have been entirely irrelevant, it was HMRC’s ruling indicating how it interpreted the law that was critical.
The High Court concluded that:
- Rejecting HMRC’s argument that its managerial discretion to collect the correct amount of tax was limited and did not extend to tax arising after an erroneous ruling had been corrected, there was a distinction between a case in which tax was undoubtedly payable and a case in which HMRC had given a ruling based on its view of the law, which it subsequently changed without any intervening development in the law.
- If subsequent legislation changed the law or a subsequent court or tribunal decision was inconsistent with HMRC’s interpretation of the law, a taxpayer’s legitimate expectation would be limited to reasonable notice of the implementation of the change. However, the rulings were given on the basis of the law as it then stood and there had been no such change in the law.
- In the absence of any objective change in circumstances, there was a balance to be struck between the claimants’ entitlement to expect HMRC not to change its mind and HMRC’s duty not to perpetuate a mistaken interpretation of the law. Where that balance was struck would depend on the facts of the particular case under consideration.
- In this case, the claimants were entitled to expect that HMRC would not change its mind unless and until the correct legal position was established by a tribunal or court.
This is an interesting case, which provides a helpful insight into how long a taxpayer can legitimately expect an HMRC ruling to continue to apply. HMRC will not be bound by a ruling if the law on which the ruling was given has since changed. However, this case demonstrates that, if there has not been a change in the law (or a change in some other material objective circumstance) since the ruling was given, HMRC is not free to withdraw it. In particular, taxpayers may be able to defer the implementation of a change in tax treatment unless and until a tribunal or court determines the correct interpretation of the relevant law.
However, it should be recognised that the fact pattern in this case was strongly supportive of the taxpayer’s position. The taxpayer’s request for a ruling fully set out the factual position and the importance of the ruling to its business and HMRC’s ruling was unequivocal. This, coupled with HMRC’s published guidance and the court’s preference for an interpretation of the law that supported standard rating of GSTS’s supplies, suggest that if the claimants could not win this case, taxpayers would seldom be able to challenge prospective withdrawals of rulings by HMRC. As the Court said, each case will be determined on its own particular facts, but the decision nonetheless usefully highlights the relevant factors on which a court will focus.
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