Private NHS providers in line for corporation tax exemption

Private companies providing NHS services could be exempt from paying corporation tax on their profits under proposals being considered by a government-commissioned review of competition in the health service, the Guardian has learned.

Monitor, the NHS's economic regulator, argues that as public sector hospitals do not pay corporation tax and VAT on supplies, whereas private firms do, the result is an "unfair playing field" in healthcare. The regulator was asked to look at the issues as part of a review into NHS competition, and will report to the health secretary, Jeremy Hunt, later this month.

Hunt's predecessor, Andrew Lansley, produced analysis which said "the majority of the quantifiable distortions work in favour of NHS organisations; tax, capital and pensions distortions result in a private sector acute provider facing costs about £14 higher for every £100 of cost relative to an NHS acute provide".

One source who has seen a draft of the final review said it is sympathetic to the private sector demands.

However, critics argue that it is ridiculous for companies to lobby to provide NHS services for profit and then to claim it was unfair to pay tax on their profits. Labour called on the government not to "let the tax avoiders into the NHS".

Big business says tax is a "significant economic distortion" that stops patients getting a choice in healthcare – and it appears to be a view shared by the chairman of Monitor, David Bennett, who said during an earlier consultation that there was evidence "tax rules" were preventing private healthcare companies "operating on an equal footing with others".

In the consultation, entitled Fair Playing Field, the regulator says "in some circumstances certain provider types are, as a result of their corporate form, subject to additional costs compared to other providers. This may in turn result in them finding the costs of expanding or entering a new market to be prohibitive".

Academics say the regulator has been "captured" by industry. Andrew Street, professor of health economics at the University of York, told the Guardian Monitor had "been influenced by industry. This looks like pandering to special interests to me. If companies wanted to provide NHS hospital services and not pay tax then they could do so by becoming charities."

Street, who produced a report for the then Labour-run Department of Health in 2008 that looked at the issue and rejected any tax breaks, said one London hospital got £4m in tax breaks "thanks to charitable status". "A company's aim to maximise profits is not affected by the imposition of a tax on profits. If you gave private companies tax breaks to invest in the NHS that would distort decisions."

Jamie Reed, the shadow health minister, said: "David Cameron said he wanted to turn the NHS into a 'fantastic business' and we are beginning to see what that means in practice. First he opened the door to a huge number of private providers that put profits before patient care, now the government may help them maximise their bottom line.

"The government cannot let the tax avoiders into the NHS. They risk undermining trusted NHS services and could in time destroy the core public service ethos that sets our health service apart from others.

"Ministers are leaving the NHS increasingly beholden to the private sector and less able to provide its own services. The next Labour government will repeal the free-market free-for-all that David Cameron has put at the heart of the NHS."

However, many non-state firms argue that Monitor is right to consider tax a "big issue". The Employee Ownership Association (EOA) represents companies where staff have a stake in firms.

Its members include Circle Healthcare, which runs an NHS hospital in Cambridgeshire, and the EOA told the review that "it is unfair that NHS providers do not pay corporation tax on profits but social enterprise providers do. The net impact of the current situation is the market has within it a bias towards one type of provider and that social enterprise providers invest less in their social mission because of this tax liability."

David Worskett of NHS Partners Network, which represents private providers in the NHS, said that "corporation tax and VAT are significant economic distortions and it would be extremely helpful to have them addressed by the government".

Monitor denies being "influenced by any stakeholder". In a statement, a spokesperson for the regulator said it was "currently working on the Fair Playing Field review and, as part of this work, is consulting a range of providers and other stakeholders from the public, voluntary and private sectors. We will be submitting our final report to the [secretary of state] at the end of March at which point he will lay his own response before parliament."

A Department of Health spokesperson said: "We have commissioned Monitor to carry out their Fair Playing Field review. Once it has been completed and submitted to the department, we will consider how to respond."