Judgment summary
This is an appeal by NHS Ayrshire and Arran Health Board against a decision of the First-tier Tribunal (Tax Chamber) released on 1 May 2025, reported as [2025] UKFTT 502 (TC) (1).
The appeal concerns the VAT treatment of construction services and materials used in building the National Secure Adolescent Inpatient Service (NSAIS), a medium-secure inpatient mental health facility within the grounds of Ayrshire Central Hospital (2).
The FTT had dismissed NHS Ayrshire's appeal against HMRC's decision that construction services relating to an accommodation or bedroom wing (the "Bedroom Wing") could not be zero-rated under item 2, Group 5, Schedule 8 of the Value Added Tax Act 1994, because the Bedroom Wing was not intended to be used solely for a "relevant residential purpose" (2).
The FTT refused permission to appeal, and the Upper Tribunal granted permission on three grounds (3). The Upper Tribunal dismissed all three grounds and dismissed the appeal (82).
Background
NSAIS was designed as a national facility providing secure inpatient mental health treatment for up to twelve young persons aged 12 to 18 who suffer from mental disorders, detained under court orders pursuant to the Criminal Procedure (Scotland) Act 1995 or the Mental Health (Care and Treatment) (Scotland) Act 2003 (9).
The Bedroom Wing contains 12 bedrooms with en-suite bathrooms, two social areas or lounges, an external courtyard, ancillary rooms, and a connecting corridor. The wider complex includes clinical, educational, dining, shared, and staff-only areas (11).
All areas are covered by active security and CCTV except the bedrooms themselves, though the Bedroom Wing remains subject to strict security features, including nursing overrides of bedroom locks and continuous observation every 15 to 20 minutes (12).
The FTT found that medical treatment, as defined in section 329 of the 2003 Act, is delivered throughout the complex, including the Bedroom Wing (14, 22). Patients sleep and use bathroom facilities in the Bedroom Wing but do not take meals or receive family visitors there (15). Patients' legal residence and address is NSAIS, not the Bedroom Wing specifically (16). The anticipated length of stay is commonly between 18 months and several years (17).
Core dispute
The central issue was whether NSAIS is a hospital or similar institution such that supplies are not zero-rated, or whether the Bedroom Wing is a distinct and separate part of the building intended to be used solely for a relevant residential purpose (RRP), in which case zero-rating would apply (FTT [15], cited at 42).
The Upper Tribunal granted permission to appeal on three grounds: Ground 1, that the FTT erred in concluding the Bedroom Wing was not a 'part of a building' within Note (10); Ground 2, that the FTT erred in concluding the intended use of the Bedroom Wing did not fall within Note (4)(a), (b) or (g); and Ground 3, that the FTT erred in concluding the intended use of the Bedroom Wing was 'use as a hospital' excluding zero-rating (27).
A preliminary issue arose as to whether NHS Ayrshire could introduce a new argument, not raised before the FTT, that common kitchen and dining areas contiguous to the Bedroom Wing should also be included within the part of the building intended for relevant residential purpose use (28-32).
Court findings
The Upper Tribunal refused NHS Ayrshire's application to introduce the new argument concerning the common kitchen and dining areas, finding it was not part of the case before the FTT, was not a pure point of law requiring no new evidence, and would prejudice HMRC by requiring revisiting of evidence and potentially an adjournment (34).
On Ground 1, the Tribunal found no material error of law. On a fair reading of the FTT Decision as a whole, the FTT treated the Bedroom Wing as a distinct and separate part of the NSAIS building, and its references to the Bedroom Wing being an 'integral and inextricable part' of the complex were directed at questions of use, not at whether it constituted 'part of a building' for Note (10) purposes (46-49).
On Grounds 2 and 3, taken together, the Tribunal held that the FTT was entitled to have regard to the use and functions of the remainder of the NSAIS complex in determining whether the Bedroom Wing fell within Note (4), given the interdependence between the Bedroom Wing and the rest of the complex (76-77, 80).
The Tribunal rejected the submission that being a patient's sole residence automatically meant the accommodation was for a relevant residential purpose, noting the statutory structure of Note (4) allows the exception to apply even to accommodation that might otherwise appear residential (79(1)).
The Tribunal found the Bedroom Wing was not a self-standing 'home' or 'institution' but part of the single NSAIS facility, which is a hospital or similar institution within the exception to Note (4) (79(3)). Medical treatment delivered in the Bedroom Wing, including nursing observations feeding into care plans, was found to be a continuation of treatment provided elsewhere in the complex, forming an integrated course of treatment (79(4)).
The Tribunal distinguished the case from Fenwood Developments Ltd v HMRC and Pennine Care NHS Trust v HMRC, noting that in those cases the primary purpose of the relevant building was care rather than treatment, whereas at NSAIS the primary purpose was treatment (79(5)).
Outcome
The Upper Tribunal dismissed Ground 1, Ground 2, and Ground 3 of the appeal, finding no material error of law in the FTT Decision (50, 81). The Upper Tribunal dismissed the appeal in its entirety (82).
Major issues / areas of contention
- Whether the Bedroom Wing constituted a 'part of a building' for the purposes of Note (10) to Group 5, Schedule 8 VATA, separate from the FTT's assessment of intended use.
- Whether the intended use of the Bedroom Wing fell within Note (4)(a), (b) or (g) as residential accommodation for children, persons needing personal care due to mental disorder, or as the sole or main residence of at least 90 per cent of its residents.
- Whether the Bedroom Wing was intended for use as a 'hospital or similar institution' so as to trigger the exception in Note (4), excluding zero-rating.
- Whether it was permissible, in applying Note (4) via Note (10), to have regard to the use and function of other parts of the NSAIS complex when assessing the intended use of the Bedroom Wing alone.
- Whether NHS Ayrshire should be permitted to raise, for the first time on appeal, a new argument concerning common kitchen and dining areas contiguous to the Bedroom Wing.