In City Fresh Services Ltd v HMRC2, the FTT has held that each supply in a chain of medical supplies was exempt for VAT purposes, and it was not a condition of the exemption for the supply to be made to the final patient.


In March 2009, two partners of an existing dental practice (CDP) set up City Fresh Services Limited (City Fresh) as an alternative entity through which to provide their dental services to an NHS trust.

Due to issues relating to an existing contract between CDP and the NHS for dental services, the services from City Fresh were provided via CDP, which retained the contract with the NHS trust and sub contracted its dental services to City Fresh.

From March 2010, City Fresh invoiced CDP for the supply of dental services for a fixed monthly fee.

HMRC queried the VAT status of City Fresh during the course of a direct tax enquiry. Later, by decision letter dated 1 October 2013, HMRC confirmed that City Fresh was required to register for VAT from 1 August 2010, on the basis that it made standard rated supplies of staff and accordingly the business’s turnover exceeded the VAT registration threshold.

City Fresh appealed the decision. It submitted that the supplies were exempt as the provision of medical care provided in Item 2, Group 7 of Schedule 9 of the Value Added Tax Act 1994. It argued that the nature of the recipient of the supplies was not a component of the exemption and the provision of medical care was therefore not restricted to care provided directly to patients.

The FTT’s decision

The FTT concluded that all entities were making exempt supplies of medical care and the taxpayer’s appeal was allowed.

In reaching its decision the FTT considered the following two issues:

  • whether the supplies of medical care must be made to the final patient
  • whether the supplies were a supply of medical care or a supply of staff.

Whether the supplies of medical care must be made to the final patient

  • The FTT considered whether the addition of a third party in a supply chain altered the nature of the supply being made. It acknowledged that whilst there are some circumstances where the insertion of a third party will break the link between the supply of the services and the recipient, that was not the case in the present appeal. In this case, it was clear from the evidence that what the patient received was exactly the same whether provided directly  from CDP or as a service sub-contracted via City Fresh. The essential nature of the supply was a supply of dental services.
  • The FTT confirmed that unless a chain of entities has been set up for abusive purposes, or there was complete coincidence between the services provided by each entity to the end user, then the nature of the services should not be treated any differently. There was no suggestion of either scenario in the present case and therefore the introduction of the third party had no impact on the substance of the supplies made.

Supply of medical care or supply of staff?

  • HMRC argued that as the dentists were under CDP’s control and it was CDP which was legally obliged to provide the dental services to the NHS trust, the supply made by City Fresh was a supply of staff.
  • The FTT disagreed. It confirmed that a supply would be a supply of staff if the recipient, by controlling the persons supplied, can control their activities and in so doing change the nature  of the supply made. Although CDP was an intervening entity, there was no evidence that CDP changed the nature of the supply or that there was a change of control from City Fresh to CDP over the dentists’ activities. The evidence indicated that this was a back to back arrangement and on this basis the FTT concluded that it was a supply of medical care.


The decision in this case will be welcomed by taxpayers. Had the FTT found in HMRC’s favour, there could have been a significant impact on the economics of outsourcing medical supplies.

The decision is of more wider relevance, and provides guidance on the application of exemptions in supply chains and the circumstances where the introduction of a third party will alter the nature of the supply being made. In this case it was clear that the supplies operated in exactly the same way before and after the incorporation of City Fresh. Each case will however turn on its facts and businesses should carefully consider each supply in a chain to ensure they apply the correct treatment and retain sufficient evidence of the nature of the supplies they make.

The FTT’s decision can be read here.