In HMRC v Northumbria Healthcare NHS Foundation Trust [2020] EWCA Civ 874, the Trust was able to fully recover VAT on cars supplied to its employees under a salary sacrifice scheme, whilst also not charging VAT on the leases. It was deemed not to be carrying out an economic exercise.

  • The Northumbria Healthcare NHS Trust ('the Trust') provides its employees with motor cars as part of a Salary Sacrifice scheme.
  • The Trust is able to lease cars cheaply under public sector leasing agreements and it offers car leasing to employees of public sector organisations under back-to-back leasing arrangements. 
  • The Trust was established under the Health and Social Care (Community Health and Standards) Act 2003 and its statutory activities include the provision of hospital and community health service. The carrying out by the Trust of its statutory functions is regarded as a non-business activity for VAT purposes.
  • The UK's own domestic VAT measures aim to encourage public authorities to outsource services without VAT charges.
  • The UK made the Value Added Tax (Treatment of Transactions) Order 1992, the order is referred to as the 'De-Supply Order'. Article 2 provides:
    "Where an employer gives an employee a choice between
    (a) a particular rate of wages, salary or emoluments, or
    (b) in the alternative a lower rate of wages, salary or emoluments and, in addition, the right to the private use of a motor car provided by the employer, and the employee chooses the alternative described in paragraph (b) above, then the provision to the employee of the right to use the motor car privately shall be treated as neither a supply of goods nor a supply of services (if it otherwise would be) to the extent only that the consideration for the provision of the motor car for the employee's private use is the difference between the wages, salary or emoluments available to him under paragraphs (a) and (b) of this article."
  • HMRC had refunded VAT incurred by the Trust on the supply of the cars but restricted the Trust’s recovery to 50% of the VAT incurred.
  • The Trust sought a refund of the remaining 50% of the VAT incurred on the acquisition of cars. It argued that an economic activity requires a supply of goods or services and since the provision of cars by the Trust to its employees was not a supply, it could not be an economic activity.
  • HMRC argued that concepts of 'supply' and 'business' (or 'economic activity'), while related, are distinct concepts.

On appeal by HMRC the Court of Appeal confirmed that due to the deeming provision of the De-Supply Order in respect of the provision of cars to employees under the salary sacrifice arrangements, there was no economic activity.

Further, although it was argued that De-Supply Order was contrary to EU law because of the decision of The Court of Justice of the European Union (CJEU) in (Case C-40/09) Astra Zeneca UK Ltd v HMRC [2010] STC 2298. As there was no explanation as to why the government had not revoked that De-Supply Order in the 10 years that have elapsed since that decision, the Trust was entitled to rely on the Order.


Staff and VAT
What are the VAT issues when an employer supplies services to an employee or vice versa?.

Optional remuneration schemes & salary sacrifice
What is a salary sacrifice or optional remuneration arrangement? How is it taxed?

External links

HMRC v Northumbria Healthcare NHS Foundation Trust [2020] EWCA Civ 874