Gloucestershire Hospitals NHS Foundation Trust has successfully argued through judicial review in the Upper Tribunal against HMRC’s decision to block contracted-out services (COS) VAT recovery on elements of a managed healthcare facilities contract. The findings of this case could lead to increased VAT recovery on current and future contracts for other NHS bodies and an opportunity to submit retrospective claims for VAT.


The Trust had contracted with a supplier, Genmed, under a single agreement for the management of operating theatre facilities.

The contract included:
• Services, consisting of maintenance, sterilisation, data analytics, training, stock contract and management.
• Goods, consisting of structural items such as furniture and plant, and re-usable medical equipment such as ventilators and microscopes.
• Consumables, consisting of single-use items such as sutures and bandages, and prostheses, such as hip and knee joints all of which are used and provided to patients during surgery.

The consumables made up around 70% of Genmed’s contract charge. The Trust had sought HMRC’s agreement to recover the VAT under COS heading 45, Operation of hospitals, health care establishments and health care facilities and the provision of any related services. HMRC agreed that the Trust could recover VAT on the services and goods, but refused VAT recovery on the consumables on the grounds that these were a separate supply of goods not closely related to the supply of the services.

The decision

The Trust was granted permission for judicial review challenging the lawfulness of HMRC’s decision, arguing that all the component parts of fully managed theatre facilities, including consumables, are integral to each other and indispensable to the achievement of the Trust’s aims. Therefore, the Trust argued there was a single supply made by Genmed, and VAT was recoverable on the whole agreement.

After reviewing both the Trust’s and HMRC’s arguments, the Tribunal agreed with the Trust. It stated that on an objective basis and from the point of view of a typical consumer, the supply by Genmed of the services and consumables are so closely linked that they form a single composite supply, being a fully managed theatre facility, that it would be artificial to split. The Tribunal then stated that the single supply of services falls under COS 45, therefore HMRC’s decision to refuse a VAT refund was unlawful.

How does this affect NHS organisations?

COS VAT recovery is generally limited to the financial year, subject to a 3-month adjustment period. However, where HMRC has instructed an NHS body that it cannot claim COS VAT on a particular supply and this turns out to be incorrect, the four-year time limit applies.

Therefore, if your NHS organisation has entered into a similar contract to the one highlighted in this case and has either been refused or assessed for VAT recovery by HMRC, you may be able to make a claim. There may also be the opportunity to review current and future contracts for VAT recovery in light of this case. This case also highlighted that HMRC has ‘limited power’ to interpret, narrow or extend the right to VAT recovery under COS. This means that many more refusals or assessments by HMRC in respect of COS VAT could be open to challenge.

Please contact us at the earliest opportunity if this affects your NHS organisation.