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NHS foundation trust wins legal case and is entitled to a VAT refund on operating theatre consumables

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By Alison Martin, Carol Sumner & John Dunlop


Published 14 February 2023


Gloucestershire Hospitals NHS Foundation Trust (the “Trust”) brought a claim for judicial review against HMRC which had refused to refund VAT paid by the Trust on operating theatre consumables (“Consumables”). The Consumables had been supplied to the Trust by Genmed.Me Limited (“Genmed”) under a broader agreement for healthcare facility services (“Agreement”).

HMRC allowed a VAT refund in respect of infrastructure and equipment provided by Genmed, however it refused relief on Consumables which ranged from sutures, bandages and gauze to protheses such as hip and knee joints used during the course of surgery. HMRC decided that these items fell outside the entitlement available under Heading 45 of the Contracted-Out Services Direction (“COSD”) for healthcare facilities and related services. Whilst other headings specifically refer to Consumables, Heading 45 is silent on the matter. 

The central issue before the Upper Tribunal (“UT”) (on referral from the High Court) was whether:

(a)  a single supply of healthcare facility services which included Consumables had been made to the Trust, or

(b)  whether multiple and separate supplies of Consumables and healthcare facility services had been made with consequently differing VAT treatments.

The Trust claimed that the items were part of a single, composite supply of healthcare facility services for VAT purposes. As they were practically and economically inseparable from the other supplies/services, it argued it was entitled to a refund on the entirety.


The COSD regime is intended to encourage central government and certain other public bodies including NHS Trusts which carry out non-economic activity to contract-out certain types of services which they would otherwise have carried out in-house (VAT free). Without it, VAT incurred by public bodies on the contracted-out services is irrecoverable. COSD is an administrative provision, made under section 41(3) of the Valued Added Tax Act 1994, which allows for refunds in these circumstances. It therefore removes the VAT dis-incentive from contracting-out.


The UT released its judgment on 30 January 2023 quashing HMRC’s decision. It decided that the Trust had received a single supply of a managed operating theatre, which included Consumables, and was therefore entitled to a refund under COSD on the entirety. Together they were a single, indivisible economic supply which would have been artificial to split up.  The UT also decided that even if the Consumables were not part of a single supply, they would have been ‘closely related’ to the services and hence the Trust would have qualified for relief on that basis.

Did title pass?

Another issue considered by the UT was whether title in the Consumables passed from GenMed to the Trust.  The Trust argued that it never acquired legal title or the right to dispose of them as owner; it said that Genmed retained both title and the right to ownership throughout. As such, the Trust said that it had not been ‘supplied’ at all and therefore no VAT liability was incurred.

The UT rejected this part of the Trust’s claim.

The Agreement between the Trust and GenMed did not contain any terms which expressly provided for the sale of the Consumables or for the passage of title. However, on a proper construction of the Agreement, relevant case law and the facts, the UT decided that the Trust acquired both legal title before their use in any surgical procedure and the right to dispose of them in the course of any surgical procedure. It found that there was, therefore, a supply of the items by Genmed to the Trust which was capable of attracting VAT liability.

What the case means for NHS trusts and foundations trusts

The case has significant implications for NHS trusts and foundation trusts. It establishes an important precedent in the application of VAT principles to contracted-out services and facilities contracts with the private sector or a trust’s wholly owned subsidiary company which support delivery of core NHS services.

Trusts will welcome this decision as it confirms their entitlement to claim VAT relief under COS Heading 45 on consumables which are part of a single supply (where they are integrated to the main supply). In managed facilities agreements, the value of these items as a proportion of the overall cost is typically very high thus making the possibility of VAT recovery highly attractive.  In the Gloucestershire case, the VAT at stake was between £14m to £18m.

Whilst this case has value as a precedent there is a word of caution for any relevant body who needs to take a similar action against HMRC.  This case was a judicial review case rather than a straightforward VAT refund case.  As well as the additional costs which a judicial review case brings compared to a more straightforward VAT case, this has three very important implications.  First, the entity bringing the High Court claim must do so within the earlier of three months of HMRC’s decision and as soon as reasonably practicable.  Second, the threshold test in terms of proving unfairness on the part of HMRC is a high one. Third, such party must come to the court with clean hands and so this should not be part of an aggressive tax mitigation strategy on the part of an NHS trust or the like.  

The case also shows that agreements which are silent on the matter of title vesting in the contracting authority may not be water tight. Judges will look to the whole agreement and all the circumstances to determine whether there has been a vatable supply.

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