The costs to the NHS of outsourced pathology services will increase following a (reluctant) decision of the First Tier Tax Tribunal.
GSTS is a limited liability partnership between Guys and St Thomas’ NHS Foundation Trust, King’s College Hospital NHS Trust and Serco Limited. GSTS supplies services to three NHS trusts and some other clients. The services are to a large extent, though not exclusively, supplies of pathology services – testing samples of body fluid, tissue, etc, and communicating the results to the trusts for the purposes of the supply of services of medical care by the trusts or other health professionals to patients.
The main issue the tribunal had to consider was whether the supplies of pathology services were exempt from VAT as themselves constituting “medical care” as that expression has been construed by the European Court of Justice.
In response to a request by GSTS in 2008 before it commenced its activities, HMRC initially ruled that GSTS's supplies were not of exempt medical care. This meant that although GSTS was obliged to charge VAT on its supplies, it could also recover its related input tax of which it incurred a substantial amount (including on the provision of staff, seconded from the trusts). However, as the supplies were principally made to entities in the healthcare sector, GSTS's customers were able to recover VAT incurred by them pursuant to the "contracted-out services regulations". This broad effect of this was that the outsourcing of pathology services by NHS Trusts did not result in additional VAT costs for the NHS.
HMRC subsequently retracted that ruling in 2012, resulting in the case before the tribunal. In separate judicial review proceedings, it had already been held that GSTS was entitled as a matter of administrative law to rely on the original HMRC ruling in the period leading up to the release of the tribunal's decision and for a reasonable period following it.
It was agreed that some of the supplies made by GSTS, for example those provided in connection with drink driving or relating to drug trials or medical research unrelated to the treatment of any particular patient, were standard-rated as not involving medical care.
The tribunal focussed on pathology services provided in connection with the treatment of patients. It decided that such pathology was an activity closely connected with a patient’s health, provided for the purpose of maintaining or restoring the patient’s health and characterised by at least the possibility of the exercise of medical skill and judgement in matters of interpretation. These services involved, in the tribunal's view, more than the provision of information to clinicians and could themselves be characterised as medical care in accordance with the relevant European precedents.
GSTS raised other arguments, seeking to show both that the other conditions of the relevant exemption under UK law were not met and that HMRC had a discretion to apply a different treatment if the result would be to increase the cost of healthcare. All of these arguments failed. Among other findings, the tribunal held that a pathology lab regulated by the Care Quality Commission was a "state-regulated institution". It also found that although pathology does not characteristically involve contact with the patient this could not affect the intrinsic character of what was being done and that there were plenty of examples of acts of medical care which were not conducted in contact with the patient.
The tribunal recognised that the effect of its decision would be to remove the ability of outsourced pathology providers to recover a large part of the VAT that they incurred and that this unrecoverable VAT would no doubt have to be added to the costs charged to NHS trusts. This was why it came to its decision reluctantly.
Whether GSTS or any other providers of outsourced pathology services will be able to increase their charges under existing contracts will depend upon the terms of those contracts or the relative bargaining positions of the parties.
It seems unlikely, in view of the related judicial review decision to this case, that HMRC would succeed in enforcing this treatment retrospectively where they have given specific rulings to individual providers. However, where no such rulings have been given, this decision reflects HMRC's revised policy as set out in Revenue & Customs Brief 16/13, released on 5 July 2013 which they will no doubt now look to enforce.