Neutral Citation Number: [2009] EWHC 3221 (Admin)
Case No: CO/1048/2008
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 09/12/2009

Before:

MR JUSTICE CRANSTON
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Between:

	The Queen on the application of Unison	Claimant	
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	Monitor	Defendant	
	-and-		
	(1)	The Secretary of State for Health
(2)	Foundation Trust Network	Interested Parties	

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Peter Oldham and Stephen Robins (instructed by Unison Legal Services) for the Claimant
Michael Fordham QC and David Pievsky (instructed by Denton Wilde Sapte) for the Defendant
Javan Herberg and Mark Vinall (instructed by DWP/DH Legal Services) for the First Interested Party
Robert Jay QC (instructed by Capsticks) for the Second Interested Party
Hearing dates: 2, 3 November 2009
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JUDGMENT
Mr Justice Cranston: 
INTRODUCTION
1.	The legal question in this case is the proper interpretation of the phrase “income derived from private charges” in section 44 of the National Health Service Act 2006 (“the 2006 Act”).  The context in which these proceedings are brought, however, is a fiercely contested dispute about the future direction of the National Health Service (“the NHS”).  In broad outline the issue is the extent to which NHS foundation trusts are able to provide goods and services for purposes other than those of the NHS.  Since the issue is highly charged, it is important at the outset to underline that the court must resolve it in a spirit of legalism, where existing rules and principles are applied to this new problem of statutory interpretation and a best fit found.  
The parties
2.	The claimant in this case, Unison, is the largest public sector union in the United Kingdom with 1.3 million members, including more than 450,000 healthcare staff employed in the NHS across the whole range of health care provision.  As such it has an important input into health care policy.  Unison’s own approach is that it supports the founding principles of an NHS funded through direct taxation and free at the point of use.  While it recognises that as a healthcare system the NHS needs to adapt, it is concerned that NHS foundation trusts are a form of privatisation which undermine the NHS’s public service principles.  
3.	Monitor, the defendant, is the independent regulator of NHS foundation trusts.  The name is a brand name and not contained in statute.  Monitor is independent of government and directly accountable to Parliament.  Its objectives are broadly threefold: first, it is responsible for assessing NHS trusts in order to decide whether they qualify for NHS foundation trust status; secondly, it provides a regulatory framework which ensures that NHS foundation trusts are well led and financially robust so they are able to deliver quality care and value for money; and thirdly, it supports NHS foundation trust development.  
4.	The first interested party is the Secretary of State for Health (“the Secretary of State”).  His role needs no explanation.  The second interested party is the Foundation Trust Network of the NHS Confederation (“the Foundation Trust Network”).  The NHS Confederation is the only independent membership body for the full range of organisations which comprise the NHS.  It represents over 95 percent of NHS organisations and also has a growing membership of independent healthcare providers from the public, private and third sectors.  One part of the Confederation is the Foundation Trust Network, which undertakes to raise the profile of issues facing existing and aspirant NHS foundation trusts and to improve the influence of its members.  In July 2009, 119 of the 121 authorised NHS foundation trusts in England were members.  
NHS foundation trusts and the cap
5.	NHS foundation trusts were introduced as part of the government’s ten-year programme of reform known as The NHS Plan in 2000.  Under The NHS Plan the government have a commitment to increase the scope and range of private sector activity with NHS services by creating independent public interest corporations with foundation status.  Under the government’s proposals foundation status organisations would have NHS assets transferred to their ownership and control; be granted a licence to operate by an independent regulator; be freed from certain NHS controls; be run on a not-for-profit basis; and be accountable not to the Secretary of State for Health but to a board comprising employers, staff and local residents, some of whom would be locally elected.  Foundation status would mean greater freedom to generate income.  While they would not be allowed to sell their core assets, they would be allowed to raise finance for new facilities from the capital markets, subject to the government’s overall borrowing limits, and to set up joint ventures with the private sector.  According to the Department of Health’s Guide to NHS foundation trusts, published in December 2002, the top performing NHS hospital trusts would be allowed to apply for foundation status.  
6.	NHS foundation trusts were introduced by Part 1 of the Health and Social Care (Community Health and Standards) Act 2003 (“the 2003 Act”) and are now governed by Chapter 5 of Part 2 of the National Health Service Act 2006, a consolidating Act.  In accordance with The NHS Plan the statute gives them broader freedoms than NHS trusts: under the legislation they have greater financial freedoms, they are not subject to direction by the Secretary of State and they can retain any operating surpluses they generate. Instead of being centrally managed, they are supervised by the independent regulator, Monitor.  The legislative scheme is explored at greater length below.  
7.	It is because NHS foundation trusts have broader freedoms than NHS trusts that a cap was considered necessary to mitigate the risk that they would focus on private patient activity at the expense of NHS patients.  Under the legislative scheme, outlined below, NHS foundation trusts under section 44 of the 2006 Act can be restricted by Monitor in their ability to provide goods and services for purposes other than those of the NHS. Section 44 also requires Monitor to exercise that power with a view to securing that the income of a NHS foundation trust derived from private charges should not exceed a specified cap, referred to as the private patient income cap or PPI cap (“the cap”).  The cap is set as a proportion of the total income of an NHS foundation trust.  The proportion is not the same for each NHS foundation trust, but is fixed by the proportion of the income which was private patient income in a base year, usually 2002/03.
The dispute in outline
8.	This judicial review was issued on 1 February 2008. At that time, Monitor’s approach to the cap included a narrow definition of private patient income, which has since become known as "option 1". On 18 June 2008, after the proceedings were commenced, Monitor issued a consultation document, about modifying its approach to the cap.  Following consultation, on 26 November 2008 Monitor published its decision to change its definition of private patient income from "option 1" to a somewhat broader test, "option 2". Unison has proceeded with the claim, on the basis that option 2 is still too narrow, and is unlawful as contrary to the test embodied in section 44.  The closest definition of the cap to Unison’s position is what was labelled option 3 in the Monitor consultation.  
9.	Thus Unison contends that Monitor has defined income derived from private charges in section 44(2) of the 2006 Act too narrowly, with the result that NHS foundation trusts have breached the statutory limit on private patient income.   Unison submits that this follows from the ordinary meaning of the words of section 44 but that if there is any ambiguity in the statutory language Hansard material also supports its case.
10.	Monitor contends that its operation of the cap has been lawful.  In essence it submits that it has a considerable discretion in interpreting and applying the cap.  In particular, it contends, the approach to interpretation adopted by Unison would produce a cap fraught with difficulties and impracticalities.  This stance is supported by the Foundation Trust Network.  While ideally it would want Monitor to return to the less restrictive cap, option 1, it is content to support Monitor’s existing approach.  The adoption of anything like that advocated by Unison would, in its submission, be both unreasonable and unworkable.  It has submitted a number of case studies to support that submission.  
11.	The Secretary of State adopts the middle ground between Monitor and Unison.  He agrees with Unison that option 2 is an unlawfully narrow approach which fails to include certain types of income which, by virtue of s.44, are properly to be classified as private patient income.   On the other hand, his view of the correct test is not as broad as that advocated by Unison. In particular, he does not contend that Monitor was required as a matter of law to adopt the wider option 3 consulted upon by Monitor and advocated by Unison.
BACKGROUND
The manual
12.	Monitor issues an NHS Foundation Trust Financial Reporting Manual (“the manual”) on an annual basis, containing directions as to how NHS foundation trusts must prepare their accounts.  It does this pursuant to paragraphs 24 and 25 of schedule 7 of the 2006 Act.  It is issued following Monitor’s annual review of the relevant accounting practices, HM Treasury’s Financial Reporting Manual (“the Treasury Manual”) and a consultation process allowing those affected by the rules to comment on proposed changes or to suggest areas for improvement.  Generally the manual has required NHS foundation trusts to follow general accounting standards and those in the Treasury Manual.  Specific rules are set out only where NHS foundation trusts are required to depart from those standards, or are faced with particular circumstances which they do not address.
13.	One of the areas in which the Treasury Manual does not set out specific rules is in relation to the cap.  Here Monitor has set accounting rules of its own devising.  The rule which operated from the outset until 2009/10 – described as option 1 – was set out in the 2006/07 manual as follows: 
“3.62 Private patient income is defined as patient related income arising from charges imposed by the NHS foundation trust in respect of goods and services provided by the NHS foundation trust directly to patients other than for the purposes of the National Health Service.  For the avoidance of doubt, income receivable in relation to the NHS patients but not receivable from NHS bodies (e.g. Road Traffic Act income) and income for EEA, other overseas patients treated under reciprocal healthcare agreements and treatment given in an accident and emergency department are not private patient income.  Further guidance in this area is set out in the National Health Service (Charges to Overseas Visitors) Regulations 1989, as amended located on the Department of Health’s website.
3.63 Patient related income includes the following:
•	income received from PCTs [Primary Care Trusts] and specialist commissioners for contracted patient care services;
•	income received from other NHS trusts for contracted patient care services;
•	income received from the Department of Health for patient care services;
•	non NHS private patient income;
•	other income for patient care services (including Road Traffic Act income, the Ministry of Defence, local authorities, the prison service etc); and
•	any amounts received from SHAs [Strategic Health Authorities] for patient care services, including income for overseas patients treated under reciprocal agreements.
3.64 Where an NHS foundation trust prepares group accounts, patient related income and private patient income receivable by the NHS foundation trust, and the relevant proportion from its subsidiaries (as defined by [Financial Reporting Standards] 2),  should be included in the calculation of private patient income and patient related income for the purposes of the Private Patient Cap.  Income from joint arrangements that are not entities also falls within the scope of the definition of private patient income and patient related income.  Income from associate relationships, joint ventures and investments (as defined by UK GAAP [Generally Accepted Accounting Principles]) falls outside the scope of the definition of private patient income and patient related income.
3.65 Any income receivable from NHS bodies that is not related to the provision of healthcare and falls outside the scope of contracts for patient care should not be included in the calculation of patient related income.”
14.	As a result of Monitor’s consultation on the matter the paragraph on private patient income in the 2007/08 manual was left blank and marked “to follow”.  In the 2008/09 manual, issued in September 2008, there was a warning about the ongoing consultation, although in the meanwhile the option 1 rule was included for use.  The 2009/10 manual, issued on 21 November 2008, set out option 1 as the approach to be adopted but noted that Monitor’s interpretation was subject to judicial review proceedings brought by Unison and might be amended.  
15.	Following Monitor’s decision to adopt so-called option 2 in late 2008, the 2009/10 manual was reissued on 5 January and 12 June 2009.  The part of the manual dealing with private patient income was amended to reflect option 2.  
“4.49 Private patient income is defined as:
•	patient related income arising from charges imposed by the NHS foundation trust in respect of goods and services provided by the NHS foundation trust directly to patients other than for the purposes of the National Health Service;
•	the relevant proportion of any income from subsidiaries (as defined by IAS [International Accounting Standards] 27) joint ventures or associates (as defined by IAS 31 and 28) arising from charges in respect of goods and services provided directly to patients other than for the purposes of the National Health Service.  The relevant proportion is in relation to the interest held over the period in which the income arose.  Income from Joint Arrangements that are Not Entities (JANEs) also falls within the scope of the definition of private patient income.
4.50 For the avoidance of doubt, income receivable in relation to NHS patients but not receivable from NHS bodies (e.g. NHS Injury Scheme income), income from the provision of care services to other public bodies (e.g for the Ministry of Defence) and income for EEA [European Economic Area], other overseas patients treated under reciprocal healthcare agreements and treatment given in an accident and emergency department are not private patient income.  Further guidance on overseas patients is set out in the National Health Service (Charges to Overseas Visitors) Regulations 1989, as amended, located on the Department of Health’s website.
4.51 Patient related income includes the following:
•	income received from PCTs [Primary Care Trusts] and specialist commissioners for contracted patient care services;
•	income received from other NHS trusts for contracted patients care services;
•	income received from the Department of Health for patient care services;
•	other income for patient care services (including NHS Injury Scheme income, income from the Ministry of Defence, local authorities, the prison service etc);
•	any amounts received from SHAs [Strategic Health Authorities] for patient care services, including income for overseas patients treated under reciprocal agreements;
•	the relevant proportion of income received by subsidiaries, JANEs, joint ventures and associates arsing from the provision of goods and services to NHS patients; and 
•	non-NHS private patient income as defined above.”
16.	As can be seen some of the concepts in this part of the manual are derived from International Accounting Standards (“the IAS”).  Thus IAS 27 defines the term “subsidiary” to mean “an entity, including an unincorporated entity such as a partnership, which is controlled by another entity, the parent. The term “control” is defined as “the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities”.  IAS 31 defines the term “joint venture” to mean a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.  The term “joint control” is defined to mean “the contractually agreed sharing of control over an economic activity” and the word “control” is defined to mean the power to govern the financial and operating policies of an economic activity.    
17.	“Associate” is defined in IAS 28 as an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence, which is neither a subsidiary nor an interest in a joint venture. Paragraph 6 of IAS 28 provides: 
“If an investor holds, directly or indirectly (e.g. through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly (e.g. through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.”
There is no separate IAS for joint arrangements that are not entities (“JANEs”), but there is a discussion of their characteristics in the Generally Accepted Accounting Principles (the GAAP).  Similarly, there is no definition of “investments” contained in IAS.  In the Generally Accepted Accounting Principles the most common types of investments, and their purposes, are discussed.  
18.	As indicated NHS foundation trusts are required to comply with the manual.  Monitor does not pro-actively police the cap or carry out random investigations.  It relies to a great extent upon what it is told by an NHS foundation trust’s auditors, the accounts and self-certification of ongoing compliance by boards with the terms of their authorisation.  The Audit Code for NHS foundation trusts prescribes the way in which auditors are required to carry out their audit functions.  The Audit Code is produced by Monitor under its powers under the 2006 Act and indicates that the accounting requirements are those in the manual.  The Audit Code requires auditors to be satisfied that the accounts comply with the manual.  In addition, each year Monitor commissions the Quality Assurance Directorate of the Institute of Chartered Accountants in England and Wales to review the audits of a sample of ten NHS foundation trusts.  This covers the work of each of the main auditors of NHS foundation trusts and a report is made to Monitor whether those audits have been performed in accordance with the Audit Code.  
19.	Earlier it was said that Monitor conducts an annual consultation on the manual.  The 2009/10 manual consultation document included clarification on the treatment of charities, which was specifically excluded from the consultation exercise on the cap.  Under International Accounting Standards, if an NHS charitable fund is considered to be a subsidiary of an NHS foundation trust, consolidated accounts should be prepared.  Monitor has successfully applied to HM Treasury for a one year delay in the application of IAS 27 to NHS charitable funds.  The intention in obtaining this dispensation was “to give NHS foundation trusts sufficient time to restructure their charities where they currently meet the control tests but where it is not in the interests of the charity to be consolidated.”
Monitor’s consultation on the cap
20.	As a result of Unison’s complaints about the way the cap was being applied Monitor decided at their January 2008 board meeting to conduct a consultation.  Interested parties were invited to contribute to drafting the consultation document.  Consultation on the interpretation and application of the private patient income cap (“the consultation document”) was published in June 2008.  After some background on NHS foundation trusts, the consultation document explained that in setting a cap on the proportion of income earned from private charges, the legislation sought to provide a safeguard to ensure that NHS foundation trusts focused on their principal purpose of providing goods and services for the purposes of the health service in England.  It was noteworthy, it said, that the cap was not applied to NHS trusts, although it was the case that the Secretary of State for Health retained control over NHS trusts.    
21.	The document explained Monitor’s existing approach.  That approach was intended, it said, to reflect the principle that NHS foundation trusts should include the relevant proportion of income from any arrangement over which they had control.  Thus control, according to the document, was crucial.  The document went on to examine the possibility of applying the cap so as to include other sources of income arising from the provision of goods and services to other bodies which provide healthcare to private patients.  Under this head the consultation document said: 
“Under its broadest interpretation, the phrase “derived from private charges” (in section 44(2) of the 2006 Act) could be taken to include any transaction where the economic value is ultimately derived from a charge to a private patient.  Under such an interpretation whether the NHS foundation trust or another body entirely levies the charge is not relevant.  Adopting such an approach would significantly change the operation of the [cap] and bring a wide range of other financial arrangements within its scope.”
The consultation document summarised in a table the sources of income for NHS foundation trusts which could be interpreted as falling within the cap.  The provision of clinical goods and services to providers of private health services could include laboratory services, the provision of nursing staff, the provision of laboratory time and pharmaceuticals.  The provision of facilities management goods and services to providers of private health services could include dental agreements and laundry services.  Thirdly, there was charitable income arising from charities funded through the provision of services to private patients.  The consultation document commented that incorporating these sources of income might introduce a number of technical challenges in accounting for private patient income.  NHS foundation trusts would need to be able to allocate the use of their goods and services to individual patients treated by the entity to which they provided the service, or make a reasonable estimate of the proportion of the goods and services they provided which were used to support the treatment of private patients.  Putting such systems in place was likely to be complicated, bureaucratic and expensive.  
22.	The consultation document turned to the three options which Monitor considered might be used.  Option 1, Monitor’s then current approach; Option 2, under which income from a wider range of joint arrangements was included; and Option 3, which included not only a wider range of joint arrangements but also income received from the provision of goods and services to third party providers of private healthcare, income from investments and income from charitable donations where funded by the provision of private healthcare.  
23.	Each of the three options was expressed in tabular form, demonstrating at a glance which income was to be included either in full or as a proportion.  There was also an explanation in the text.  Under Option 1, used by Monitor since 2004/05, NHS foundation trusts had to include in the cap income earned from the provision of private healthcare, including the relevant proportion of income earned through joint arrangements and subsidiaries.  Income arising through associates, joint ventures and investments was excluded with the reasoning, the consultation paper explained, that an NHS foundation trust did not have control over them.  Also excluded was income derived from the provision of goods and services to third parties which, in turn, provided private healthcare, apparently with the same rationale.  Thus excluded was the provision of clinical goods and services to providers of services to private patients; the provisions of facilities management goods and services to providers of services to private patients; and donations from charities funded through the provision of services to private patients.  
24.	Option 2 added income from a wider range of joint arrangements.  Thus a relevant proportion of income would also be included from associates (including agency arrangements) and joint ventures (including companies limited by shares, companies limited by guarantee, and community interest companies).  Investment income, however, was excluded.  The implications were said to be that option 2 would extend the definition of private patient income so that any involvement of the NHS foundation trust in the provision of goods and services to private patients, from which the NHS foundation trust received income, would be included, regardless of whether the NHS foundation trust itself directly controlled the delivery of care.  Wording for option 2 in the manual was included and, as is explained below, adopted.  
25.	As for option 3, it was said to represent the widest interpretation of the legislation and to capture any income to NHS foundation trusts which was connected with the provision of private healthcare, whether by the NHS foundation trust or some other body.  Option 3 included all the arrangements included in option 2 and added income received from the provision of goods and services to third parties which provide healthcare, income from investments, and charitable donations funded by the provision of private healthcare.  The consultation document said that the implications of including income from the provision of goods and services to third parties was that a wide range of services could potentially be included, for example, income from the provision of drugs or laboratory services to private healthcare providers, income from rental agreements and the provision of facilities management services such as laundry services.  
“NHS foundation trusts would have to introduce systems to identify whether the services they provide to other entities are used to support the treatment of private patients.  As many providers (not least NHS organisations) provide care for both private and NHS patients this could be both complex and bureaucratic.  NHS foundation trusts would need to be able to allocate the use of their goods and services to individual patients treated by the entity to whom they provide the service, or make a reasonable estimate of the proportion of the goods and services they provide that are used to support the treatment of private patients.”
Possible wording for the manual under option 3 was set out.
The consultation responses
26.	The consultation closed on 9 September 2008.  As well as their response on the three options, consultees were asked if they considered any modifications to the three options would provide a more appropriate approach.  
27.	Most of the respondents supported the existing approach, option 1.  However, there was support for option 2 from the Audit Commission and the accountancy firms Grant Thornton and Deloittes, both of which are auditors to NHS bodies.  All three considered that income from associates and joint ventures should be included within the cap.  Two NHS foundation trusts also supported option 2.  The Audit Commission supported option 2 since it provided a framework that both reflected the objectives of the legislation and was workable.  Excluding associates and joint ventures were described as a potential “loophole” by Grant Thornton, since it allowed an NHS foundation trust to establish arrangements over which it had a significant influence and could earn private patient income outside the cap.  However, Grant Thornton did not believe it was reasonable to include income from investments, charitable donations or the provision of goods and services to third parties since the NHS foundation trust would not have a significant influence over the other party involved in the arrangement.   
28.	As for Deloittes, its preferred option was, in fact, broadly, option 2, coupled with an element of option 3.  It considered there to be merit in not differentiating between a proportion of income derived from different forms of entity where an NHS foundation trust had control, dominant influence or significant influence.  Hence Deloittes supported bringing into the cap calculation the relevant proportion of gross income from subsidiaries, associates, joint ventures and JANEs.  The element of option 3 which Deloittes would also include in their preferred option would be the relevant proportion of dividend or other distribution income from investments in entities involved in private patient activity.  It is said that this latter element would be more practical to include in the calculation in the time available than a relevant proportion of the gross income generated by an investment where the NHS foundation trust did not have any significant influence, usually defined as less than a 20% equity or profit sharing interest.  It was likely, it said, that the NHS foundation trust could not influence the generation of the necessary information if a proportion of the gross income of such an investment was fully included.  
29.	The Audit Commission considered that with Option 3 there would be significant evidential and measurement difficulties for those preparing financial statements if income from the provision of goods and services to third parties were to be included.  Deloittes and Grant Thornton raised concerns that an NHS foundation trust may simply not be able to obtain the necessary information to allow it to account for the proportion of income of investments or charitable donations which related to private patient charges, since the NHS foundation trust would have no significant influence over the body which would provide the data.  Deloittes suggested that it may be easier to include dividend income in relation to investments.  Several NHS foundation trusts raised the concern that they would not be able to trace the “final user” in relation to the provision of pharmaceuticals and laboratory tests.  As many providers treat both NHS and private patients this was not a simple matter.  
30.	The Secretary of State responded to the consultation contending that the words “derived from private charges” in section 44 of the 2006 Act were broad and should include income from associates, joint ventures and investments, and income from the provision of goods and services to third parties, where the income was derived from private patient charges.  Unison, of course, advocated the broadest possible option to capture private patient income.  
The decision: option 2 adopted; option 3 rejected
31.	Monitor’s board met on 29 October 2008 to review the responses to the consultation.  The board did not make a final decision about which option to adopt at that meeting, although it expressed a preliminary view that it was minded to make some changes to its existing approach.  However, it did express the view that option 3 was not a viable option.  This was because option 3 “would be unworkable, and capable of absurdity and a potentially unenforceable regulatory regime if adopted in its entirety”.  The board also considered whether a modified version of option 3 could be adopted, but expressed the view that “its implementation would still have potentially significant and adverse implications for NHS foundation trusts and for the delivery of patient care.”  The board also expressed the view that given the problems and disincentives which arose from the fact that the cap had then been in place for six years, and had been set by reference to a base year, it might be appropriate for Parliament to review the rules and provide more extensive legislative guidance.  
32.	Monitor wrote to the Department of Health on 3 November to inform it of the outcome of its board’s deliberations.  Although most respondents to the consultation were in favour of retaining the existing rules, it explained, some of the professional bodies, including the Audit Commission, argued that there was no good reason to treat subsidiaries, associates and joint ventures differently, and that the existing rules should be modified in a variety of ways.  The board appreciated the arguments that, in some respects, the rules operated to date were too permissive and it was clearly minded to make some changes which would produce a more restrictive regime.  However, the board was equally clear that option 3 was unworkable in its logical extent and capable of absurdity if adopted in its entirety.  This could not have been the intention of the legislature.  
33.	The letter then set out examples of the regulatory problems Monitor would face in any attempt to apply option 3.  Taking the view that any income that is ultimately derived from private patient charges should be included in the calculation of the cap would mean that where an NHS foundation trust provided pharmaceuticals to a third party, it would need to ascertain whether the final user of the pharmaceuticals would be an NHS or a private patient.  Yet the NHS foundation trust would have no control over the production of this information, few levers to ensure its supply, and no possibility of auditing or validating any data provided.  It would also mean that, in the event of an NHS foundation trust leasing part of its premises to a commercial entity such as a high street retailer, which then sold goods or provided services to private patients, the NHS foundation trust would need to account for that proportion of rental income which could be said to relate to such transactions.   
34.	Another example given in the letter was that a proportion of income, possibly dividends, relating to private charges of a company in which a NHS foundation trust had invested, would be included in the calculation of the cap, although the NHS foundation trust would have no significant influence over the company and it would be extremely unlikely that it would be able to secure the production of the necessary data to make the calculation.  A further example was that any charitable donations where the income of the original donor to the charity was based on private charges would be included in the calculation of the cap, yet the feasibility of securing such information was highly doubtful.  Even if Monitor could overcome such problems, the letter said, the implementation of a modified option 3 would still have potentially significant adverse implications for NHS foundation trusts, which could not have been the legislative intent.  
35.	The letter continued with what Monitor regarded as the undesirable consequences of option 3.  Income from renting premises to private providers would be brought within the calculation of the cap, but this would require some NHS foundation trusts to unwind existing relationships with private providers, with an associated loss of income for the NHS.  It would also restrict the options for NHS foundation trusts in dealing with any future spare capacity, for example, when an activity was shifted from hospitals into the community.  Income from the sale or license of technological developments or other intellectual property to providers of private healthcare or overseas would be counted against the cap, which would significantly reduce the incentives for innovation.  The ability of NHS foundation trusts to provide pharmaceuticals and laboratory tests to providers of services to private patients, including other NHS trusts, would be limited.  
36.	There was another meeting of Monitor’s board on 26 November 2008.  It was at that point that it decided to adopt option 2.  This is the main decision under challenge in this judicial review. The board expressed the view that option 2 was both a different approach from that set out in the existing manual but also a logical extension of the accounting advice underlying option 1.  It would bring within the cap the relevant proportion of income arising from private patient charges for goods and services provided by associate and joint venture arrangements.  The board noted the arguments raised by some respondents to the consultation as to the difficulty from an accounting perspective in distinguishing income arising from subsidiaries from that arising from joint ventures and associates.  The board reiterated its view that option 3, whether or not revised, was not viable.  It was not consistent with the legislative intention.  Moreover, option 3 could not be made workable in its logical extent and was capable of absurdity and a potentially unenforceable regulatory regime if adopted in its entirety.  Revised option 3 also contained no clear accounting or other principles which could properly form the foundation of an adequate regime.  
37.	Monitor published its response to consultation and its decision on 12 December 2008 (“the consultation response”).  This summarised the responses received and explained Monitor’s decision to adopt option 2.  In the executive summary to the document Monitor recorded that while the majority of respondents favoured retention of the current rules, it had accepted that in some respects the rules operated to date should be modified to produce a more restrictive regime.  The board noted the arguments put forward by the Audit Commission, major accounting firms and a minority of NHS foundation trusts as to the difficulty in distinguishing from an accounting perspective private patient income arising from subsidiaries from that arising from joint venture and associate arrangements.  Thus it would adopt option 2.  However, the board was not persuaded by the legal arguments presented by Unison that any income ultimately derived from private patient charges, regardless of whether or not the NHS foundation trust itself supplied the goods and services and imposed the relevant charges, should be included in the cap.  In the text of the document Monitor said this of the impact of option 3:
“The adoption of option 3 would have more widespread implications for NHS foundation trusts than the adoption of option 2.  However, and on the basis of the consultation responses, the scale of the existing services that would be affected still appears relatively small.
A number of NHS foundation trusts expressed the view that, even if possible, it would be disproportionately expensive to collect the information required to deliver option 3, for example, tracing the end users of pharmaceuticals. 
…
We have also considered whether it would be possible to modify option 3 to address some or all of these concerns.  We concluded, however, that there were no accounting or other clear principles on which we could base financial rules under such an option and, as such, those rules would be somewhat arbitrary in nature.”
THE LAW  
Legal and regulatory framework
(a)  NHS foundation trusts
38.	By section 30 of the 2006 Act an NHS foundation trust is a public benefit corporation which is authorised to provide goods and services for the purposes of the health service in England. It is constituted in accordance with schedule 7 to the 2006 Act. Section 31 provides for the independent regulator of NHS foundation trusts, i.e. Monitor.  Under section 36, an NHS foundation trust will come into existence when it has an authorisation from Monitor.  Section 38 confers a power to vary an authorisation.  Monitor’s general duty, as set out in section 32, is to exercise its functions in a manner consistent with the performance by the Secretary of State of his duties under sections 1, 3 and 258 of the Act, including, for example, his duties to promote a national health service, designed to secure improvement in people’s physical and mental health and the prevention, diagnosis and treatment of illness, by providing various health services which are generally free of charge: ss 1, 3.  Monitor may grant authorisations, allowing NHS trusts to become NHS foundation trusts if satisfied of certain prescribed matters: ss 33.
39.	There then follow sections 43-51, under the sub-heading “Functions”.  Section 43 is entitled “Authorised services”.  Section 43(1) sets out the scope for authorisation of NHS foundation trusts. 
“(1) An authorisation must authorise the NHS foundation trust to provide goods and services for purposes related to the provision of healthcare.”
Section 65(2) provides that any references to goods and services include, in particular, facilities, education and training.  “Goods” are defined in the interpretation provision, section 275(1), as including accommodation.  Thus the provision of “goods and services” would include matters such as hospital accommodation, drugs and medical treatment and care.  The meaning of the final clause of section 43(1) – “related to the provision of health care” – is spelt out in section 24.
“(8) “Healthcare” means – 
(a) services provided to individuals for or in connection with the prevention, diagnosis or treatment of illness, and 
(b) the promotion and protection of public health.”
40.	Section 43(2) then spells out the principal purpose in authorising NHS foundation trusts.
“(2) But the authorisation must secure that the principal purpose of the NHS foundation trust is the provision of goods and services for the purposes of the health service in England.”
“[T]he health service in England” is the NHS: ss. 1(1), 275.  Under section 43(3) NHS foundation trusts may in certain circumstances also carry on activities other than providing goods and services for NHS purposes.
“(3) The NHS foundation trust may also carry on activities other than those mentioned in subsection (1), subject to any restrictions in the authorisation, for the purpose of making additional income available in order better to carry out its principal purpose.”
Sub-section (4) enables the authorisation to require the provision for NHS purposes of goods and services by an NHS foundation trust.  That requirement can be framed in the various ways described in sub-section (7) by reference, among other things, to goods or services in general or of a particular description, goods or services required to meet the needs of NHS bodies or particular persons, or the volume of, place where or period within which goods and services are provided.  
41.	The rubric used for section 44 is “private health care”.  It contains a power in sub-section (1) to impose a restriction in an authorisation of the provision of goods and services by an NHS foundation trust for non-NHS purposes.
“(1) An authorisation may restrict the provision, for purposes other than those of the health service in England, of goods and services by an NHS foundation trust.”
It is in sub-section (2) that the methodology of restriction is identified – a cap on the income of any NHS foundation trust “derived from private charges”.
“(2) The power must be exercised, in particular, with a view to securing that the proportion of the total income of an NHS foundation trust which was an NHS trust in any financial year derived from private charges is not greater than the proportion of the total income of the NHS trust derived from such charges in the base financial year.”
Private charges means charges imposed in respect of goods and services provided “to patients other than patients being provided with goods and services for the purposes of the health service”, in other words, private patients: s 44(4).  The base financial year is the first financial year throughout which the body was an NHS trust or the year ending the 31st March 2003 if it was an NHS trust throughout that year.  
42.	Under section 44 (6) an NHS foundation trust has the power, in relation to its NHS patients, to provide accommodation or further services on the basis of payment to those patients, but
“only to the extent that its exercise does not to any significant extent interfere with the performance by the NHS foundation trust of its functions”: s.44(7).
An NHS foundation trust can receive financial assistance from the Secretary of State or can give its own financial assistance: ss 40(1), 46(6).  It can do what appears necessary or expedient for the purpose of or in connection with its functions, including acquiring or disposing of property and accepting gifts of property: s.47(2)(a)(c). It can borrow money: ss.41, 46(1).  It can invest money, including by forming corporate entities.  Section 46 provides:
“(4) An NHS foundation trust may invest money (other than money held by it as trustee) for the purpose of or in connection with its functions.
(5) The investment may include investment by –
(a) forming, or participating in forming, bodies corporate,
(b) otherwise acquiring membership of bodies corporate.”
43.	Schedule 7 to the 2006 Act sets out further details regarding NHS foundation trusts.  Under paragraph 25(1) Monitor may give directions to NHS foundation trusts on how their accounts are to be drawn.  Thus the direction given on 8 January 2009 is that the accounts submitted must show and give a true and fair view of the gains and losses, cash flows and financial state at the end of the financial period.  Moreover, the accounts must meet the accounting requirements of the manual in force for the relevant financial year.  If an NHS foundation trust breaches its cap Monitor uses its discretion to determine what if any regulatory action is necessary.  Where Monitor determines that a breach is significant it may take formal intervention under section 52 of the Act.  Otherwise it may take informal steps to ensure compliance.  
(b) NHS trusts
44.	These proceedings concern NHS foundation trusts, but during the course of the argument an issue arose as to the powers of NHS trusts, which are not NHS foundation trusts, to derive income by way of private charges.  NHS trusts may make accommodation and services available for patients who give undertakings to pay charges and may generate income by exercising the powers in section 7(2) of the Health and Medicines Act 1988, which include powers to deal with land or goods, supply accommodation, services or instruction, exploit intellectual property and form or invest in companies: paragraphs 19(1), 20(1) of schedule 4 of the 2006 Act.  However, each of the paragraph 19(1) and 20(1) powers can only be exercised to the extent that it does not to any significant extent interfere with the performance by the NHS trust of its functions or of its obligations under NHS contracts.  
45.	In addition, an NHS trust may only exercise the powers under paragraph 20(1) “for the purpose of making additional income available in order better to perform its functions”.  In the case of both powers, the Secretary of State can issue directions requiring his consent before the powers are exercised.  Directions have been issued requiring trusts to submit a business case for approval where it is proposed to set up or invest in a company for the purposes of income generation.  None of these restrictions applies to NHS foundation trusts carrying out private patient work, except for the limited restriction in section 44(7), which applies only when an NHS foundation trust is providing accommodation or further services to NHS patients. 
The legislative history
46.	If the meaning of words in a statute is obscure or ambiguous, the rule in Pepper v Hart [1993] AC 593 allows reference to Hansard material, provided the material relied upon consists of statements by a Minister or other promoter of the Bill, together with such other Parliamentary material as is necessary to understand such statements and their effect.  The statements relied upon must be clear.
47.	In the standing committee debates on 3rd June 2003, on what became the 2003 Act, the late Mrs Patsy Calton, MP for Cheadle, proposed two amendments to clause 15 of the Bill.  That clause was enacted as section 15 of the 2003 Act, the predecessor to section 44 of the 2006 Act. These were amendments Nos 414 and 415, which together would have expanded the definition of the term “private charges”.   
“(a) charges imposed in respect of goods and services provided to patients other than patients being provided with goods and services for the purposes of the health service; and (b) other income from private practice received by an NHS foundation trust whether directly or from bodies or persons undertaking or managing private practice in conjunction with that NHS foundation trust or from premises owned by that NHS foundation trust”.
48.	 The Health Minister, John Hutton MP, speaking on behalf of the government, said at one point (what for convenience I term “the first extract”):
“That brings us to amendments Nos 414 and 415, which were tabled by the Hon. Member for Cheadle (Mrs Calton).  We have a simple choice in this part of the Bill between the list-based approach – under which particular activities are identified as being in or outside the cap – and the approach that we have taken, which is to create a general capping power in relation to income that is derived from the treatment of private patients, and to give the regulator the job of deciding, on a case-by-case basis where necessary, whether the activity comes within the cap or not.  Generally, my experience as a Minister of trying to legislate is that it is better to do so in the latter way, rather than the former.”
49.	A little later in the proceedings of the standing committee Mr Hutton MP said (“the second extract”):  
“I assume that Amendments Nos 414 and 415 are intended to ensure that foundation trust income from private patient activity that is carried out by a subsidiary or joint venture is captured by the private patient cap. I certainly sympathise with the spirit of the amendments and I can understand that the hon. Member for Cheadle wants to ensure that there are no loopholes in the legislation that allow NHS foundation trusts to circumvent the private patient cap. I, too, believe that the cap should not be circumvented, but the amendments are unnecessary. The intention of the legislation is clear on this point. Clause 15(2) refers simply to NHS foundation trust income ‘derived’—that is the crucial word—‘from private charges’. It does not specify whether the activity is carried out by the NHS foundation trust or another body, such as a subsidiary. We shall come later to the power in clause 17(5) for NHS foundation trusts to set up subsidiaries or engage in joint ventures, which clearly relates to the power to invest. An investment is, of course, undertaken with a view to making a monetary return. Any such return from investments will be counted in the total income of the trust. It will therefore be included, I believe, in the private patient cap as defined in clause 15(2). Therefore, NHS foundation trust income from private patient activity in relation to joint ventures and subsidiaries is, I believe, already covered by the cap. It would be reasonable to expect the regulator also to impose restrictions on the leasing of facilities to other organisations for the provision of services to private patients under the terms of the authorisation. That would be consistent with the spirit of clause 15, but he would also have to ensure that NHS foundation trust activities and income were consistent with their primary purpose of providing NHS services. The NHS foundation trust could not act in a way that undermined its ability to provide NHS services, for example, by leasing facilities to a private provider if that resulted in competition for a limited pool of local staff. That would not be acceptable. For the same reasons that I gave in relation to income from joint ventures and subsidiaries, the issue that the hon. Lady raises in Amendment No 415 would equally be covered” (emphasis added). 
On the basis of this reassurance, Mrs Calton withdrew the amendments.  
 The case law on “derived from”
50.	The concept of income “derived from” a particular source has been considered in different statutory contexts.  The case law is primarily, but not exclusively, focused on tax legislation.  In summary it establishes that, to determine if a sum is derived from a particular source, it is necessary to examine its real, rather than the immediate, source.  Thus one may need to look beyond the fund or place from which the income has been paid to the real source or origin from which it was derived.   
51.	Zim Properties Ltd v Procter (1985) STC 90 arose when the taxpayer company contracted to sell some of its properties.  The purchaser repudiated and the taxpayer company issued proceedings against its solicitors, on the basis that their negligence enabled the purchaser to repudiate.  The action was compromised for £69,000 and one issue was whether the taxpayer company was correct in its contention that that capital sum was derived from the properties comprised in the contract of the sale so that it was entitled to make a deduction of their acquisition cost in calculating its tax liability.  Warner J held that the capital sum was instead derived from the taxpayer company’s right to sue its solicitors.  In the course of his judgment he said (106j-107b):
“[A]capital sum may be derived from assets within the meaning of the general words in s 22(3) even though those assets may not be the immediate source of that sum.  That is not to say that Walton J was wrong in holding in IRC v Montgomery [1975] STC 182, [1975] Ch 266 that the sum received by the trustees from Mr Greene was derived from their rights under the policies.  It means no more than that it would be a mistake to interpret Walton J’s decision in that case as authority for the proposition that the asset from which a capital sum is derived must always be the asset that constitutes its immediate source.  The true view was hinted at by Fox J in O’Brien (Inspector of Taxes) v Benson’s Hosiery (Holdings) Ltd when he referred to the “reality of the matter”.  One has to look in each case for the real (rather than the immediate) source of the capital sum.”
52.	Similarly, in Pennine Raceway Ltd v Kirklees Metropolitan Borough Council (No 2) (1989) 58 P & CR 482 the Court of Appeal held that for the purposes of the capital gains tax regime, a capital sum was derived from an asset, even though the asset was not the immediate source of that sum.  The Lands Tribunal had awarded as lost profits a sum, as compensation, where the local council had withdrawn the taxpayer company’s planning permission to use land for motor drag racing.  Its asset was the licence over the land and the compensation was derived from it, notwithstanding that its immediate source was the tribunal award.  The approach of Warner J in Zim Properties was approved by each of the three members of court.  In reality, the source of the capital sum payable to the claimant for compensation was the asset, the licence.  It was that through which the claimant was injured by the withdrawal of the planning permission and it was entitled to be paid compensation in respect of that injury: per Ralph Gibson LJ at 495.     
53.	The same approach has been followed in other common law jurisdictions.  For example, there are two Court of Appeal decisions from New Zealand: Commissioner of Inland Revenue v NV Phillips Gloeilampenfabrieken [1955] NZLR 868 and Commissioner of Inland Revenue v Farmers’ Trading Co Ltd [1982] 1 NZLR 449.    In the first the issue was whether interest received in the Netherlands from a company in New Zealand was income derived from money lent in New Zealand.  A lender in the Netherlands had lent funds to the New Zealand company, which the borrower applied in discharge of a debt to a creditor in the Netherlands under a contract made there and under which arrangements were concluded there.  The court held that the actual source of the income was the business transaction.  That did not take place in New Zealand, but in the Netherlands.  It was not sufficient to ascertain the fund from which the income was in fact paid.  “The word “derived” means more than received; it connotes the source or origin, rather than the fund or place, from which the income was taken”: per Gresson J, at 884.  That passage was approved in Farmers’ Trading Co (at 457).
54.	In a Canadian case it was said that “the word ‘derived’ covers a wider field than the word ‘received’ and when applied to the word ‘income’ it connotes the source or origin of the income rather than its immediate receipt”: Kemp v Minister of National Revenue [1948] 1 DLR 65, 71.  There the assets of an estate included tax-exempt bonds.  The trustees under the testator’s will made payments to beneficiaries out of the interest on the bonds, which they were lawfully entitled to do although not so directed by the will.  Thorson P held that the payments were income derived from the tax-exempt bonds and hence were not taxable income of the beneficiary.  The income did not lose its exempt character in passing lawfully from the trustees to the beneficiary.  Even if what the beneficiary received was not the same income as that received by the trustees as interest on the tax-exempt bonds, it was still income “derived” from such bonds.  
55.	Under social security legislation the issue has arisen whether a tribunal award for unfair dismissal is remuneration or profit derived from employment for the purposes of calculating income support.  In deciding in the affirmative the Social Security Commissioner held that interpreting the phrase “derived from” involved applying a broad causative test and it meant “having their origins in”: Decision R(SB)21/86.  
Discretion of statutory body to interpret legislation
56.	To what extent does a body like Monitor administering the legislation which constitutes it have discretion to interpret that legislation?  In R v Monopolies and Mergers Commission, ex p. South Yorkshire Transport Ltd [1993] 1 WLR 23 Lord Mustill,  with whom the other law lords agreed, said (at 32F-H): 
“Once the criterion for a judgment has been properly understood, the fact that it was formerly part of a range of possible criteria from which it was difficult to choose and on which opinions might legitimately differ becomes a matter of history. The judgment now proceeds unequivocally on the basis of the criterion as ascertained. So far, no room for controversy. But this clear-cut approach cannot be applied to every case, for the criterion so established may itself be so imprecise that different decision-makers, each acting rationally, might reach differing conclusions when applying it to the facts of a given case. In such a case the court is entitled to substitute its own opinion for that of the person to whom the decision has been entrusted only if the decision is so aberrant that it cannot be classed as rational: Edwards v. Bairstow [1956] A.C. 14 . The present is such a case. Even after eliminating inappropriate senses of “substantial” one is still left with a meaning broad enough to call for the exercise of judgment rather than an exact quantitative measurement.”
57.	That case involved the question whether a particular geographical area constituted a “substantial” part of the United Kingdom so that the jurisdictional precondition in the legislation was met.  The Commission decided that “substantial” connoted something real or important, as opposed to something merely nominal.  The reference area in Yorkshire amounted to only 1.65 percent of the total area of the United Kingdom, contained 3.2 percent of the total population and had only 4.04 percent of the total vehicle mileage.  Nonetheless the Commission decided that it contained important and significant features and was a substantial part of the United Kingdom.  Lord Mustill referred to the protean nature of the word “substantial” with its many shades of meaning.  That was reflected in the cases.  He also brought to bear the statutory context, an enabling provision designed to confer on the Commission a power to investigate mergers against the public interest, and the factual context, local bus services, a matter of importance to the public.  A “substantial” part of the United Kingdom meant a part of such size, character and importance as to make it worth consideration for the purposes of the Act.  Thus the Commission had not misdirected itself and in the circumstances had rightly concluded that the reference area was sufficiently worthy of consideration.  
58.	In Moyna v Secretary of State for Work and Pensions [2003] UKHL 47, [2003] 1 WLR 1929 the requirement in a statute in order to be entitled to a living allowance was that a person’s disability be such that he could not cook a main meal.  Lord Hoffmann, with whom the other law lords agreed, held that the Commission was correct that the question involved taking a broad view of the matter.  It required “an exercise in judgment rather than an arithmetical calculation of frequency”.  In any case in which a tribunal had to apply a standard with a greater or lesser degree of imprecision, and to take a number of factors into account, there were bound to be cases in which it will be impossible for a reviewing court to say that the tribunal must have erred in law in deciding the case either way.  Lord Hoffmann then turned to a passage in a speech of Lord Reid in Cozens v Brutus [1973] AC 834, 861, that the meaning of an ordinary word of the English language is not a question of law, but the proper construction of a statute is.  Lord Hoffmann went on to hold that it was unrealistic to think that the test could be sharpened by introducing words like “daily” or “regularly” in relation to cooking a meal to produce only one right answer.  
59.	In R (on the application of T-Mobile (UK) Ltd) v Competition Commission [2003] EWHC 1555 (Admin) mobile phone companies challenged the Commission’s decision to impose a cap on charges for calling mobile phones from fixed and mobile networks.  The legislation conferred a duty “to secure that there are provided throughout the United Kingdom, save in so far as the provision thereafter is impracticable or not reasonably practicable, such telecommunications services as to satisfy all reasonable demands for them …”: Telecommunications Act 1984, s. 3(1)(a).  Moses J held that the section required all reasonable demands to be met and whether those demands were reasonable was a matter for objective judgment.  The best means of achieving that objective was left to the decision of the regulator.  Whether a demand was reasonable was not always simple.  
“118. The question whether a demand is reasonable depends, as it seems to me, on many factors.  I reject the notion that it has one particular meaning, namely to maximise economic efficiency.  In particular I reject the notion that the question as to whether a demand is reasonable, can be answered by the application of a definition applicable in every case.  In short, the question is not “hard-edged”.  It seems to me that there is a “range of possible criteria” about which opinions might legitimately differ in deciding whether a demand is reasonable.  The statutory criterion is not clear-cut and is sufficiently broad to allow of different conclusions by different decision-makers, each acting rationally.”
60.	In my view the principle to be derived from these authorities is clear: the court determines the correct legal approach to interpreting the metes and bounds of statutory concepts such as a “substantial part” of the United Kingdom as in South Yorkshire  Transport, the ability to cook a main meal as in Moyna v Secretary of State for Work and Pensions, and satisfying all reasonable demands as in T-Mobile.  These cases do not support the conclusion that the interpretation which the relevant statutory agencies place on the legislation they administer is only challengeable on irrationality grounds.  What they do establish is that if the relevant statutory agencies adopt the correct legal interpretation the court will not substitute its own judgment for how that approach fits in its precise application to particular facts.  At least analytically there is a distinction between interpretation and application.  While respect must be accorded to agencies entrusted by Parliament with the task of administering legislation, it would not be conformable with the rules of law for them to be given free rein, subject only to an irrationality challenge, to interpret the legislation in whatsoever manner they wished.     
MONITOR’S CASE
61.	Monitor accepts that the overall context is its general statutory duty, in section 32, to exercise its functions consistently with the interests of the provision of a national health service, and the services made available through that service. It points, however, to its broad powers: to authorise a NHS foundation trust if “satisfied” of various matters: section 35(1); to impose such conditions on that NHS foundation trust as it considers “appropriate” in any such authorization: section 35(4); and to restrict goods and services provided by an NHS foundation trust, for purposes other than those of the NHS, with a view to securing that income derived from private patient changes does not exceed the cap: section 44(1)-(2).
62.	As to section 44, Monitor submits that its focus is not difficult to discern. It is in essence concerned to limit what the NHS foundation trust does as a private health care provider. Parliament was making provision as to functions.  A NHS foundation trust is empowered to act as a health care provider, “to provide goods and services for purposes related to the provision of health care”: s.43(1). But it provided for a restriction in relation to action as private health care provider, the cap.   Monitor rejects the idea that the notion “derived from” in the cap should be taken to refer to the real or true source.  That does little more than restate the key question. 
63.	An appropriate starting-point, in its submission, is with charges imposed by the NHS foundation trust relating to the direct provision of goods and services to private patients.  That is uncontroversial.  But it cannot be, submits Monitor, that the notion of income derived from private charges requires an investigation into the underlying source or origin of the income, no matter how distant or disconnected they are from the provision of goods and services by the NHS foundation trust.  The taxation case-law is of little, if any, assistance.  The logic would involve section 44, in this statutory context, having imposed a ‘tracing’ inquiry. That ‘tracing’ would extend backwards, for example, investigating investment income to trace back its original source or origin, to consider any link to healthcare. It would presumably also extend forwards, for example, investigating all uses made of private healthcare charges received, to see whether any further income can be said to result.   
64.	Specifically as to investments, Monitor rejects the argument that the cap ought to cover them.  The logic is that an NHS foundation trust cannot invest where the business is itself concerned with health care provision for which private charges are imposed. In other words, it can choose to invest in any company or portfolio, without adverse consequence for its identity and responsibilities under the Act, except a health-related company.  That position is quite unsustainable. It is clear that Parliament envisaged no such consequence. Two indicators show that. The first is that investment is a “financial power”, and under section 46(2) it may only invest in connection with its functions.  So there is a separate control.   The second is that the cap in section 44(2) is expressly a species of the restriction power in section 44(1). That, in terms, is concerned to restrict the provision of goods and services. An NHS foundation trust is in no sense a provider of goods or services when it invests money. Thus Parliament was not intending the private patient income restriction to bite on income derived from private charges, imposed on whomsoever by whomever, without reference to the closeness of the nexus, or relationship, between the NHS foundation trust and the activity of service provision. The same can be said of the situation where there is an external gift, for example, from a charity. These situations are not within the contemplation of section 44(1).
65.	Monitor has adopted an approach, it submits, which is principled and balanced.  It accepts that an NHS foundation trust’s income may reasonably be regarded as being derived from private charges for the purposes of the cap, in relation to this statutory context and purpose, if the NHS foundation trust is,  effectively, in substantial control of a third party which itself imposes private charges for goods and services provided directly to non-NHS patients. So, for example, income from a subsidiary, a joint venture into which the NHS foundation trust has entered, or from an associate, or a JANE in which it is involved, can in principle be included. But if the NHS foundation trust, in truth, has no significant influence over the third party’s provision of goods and services provided directly to non-NHS patients, then Monitor’s submission is that it makes no sense to suggest that the result of a transaction with that third party means that income from it must be treated as private patient income and included in the cap. That is why mere investments and charitable donations, in respect of which an NHS foundation trust has no control over how the money is received, are excluded.
66.	Whilst Monitor must apply the legislation, in particular section 44, in its submission it must presume that Parliament did not intend to create a situation in which it is bound to give oppressive, disproportionate, or uncertain guidance to NHS foundation trusts.  Moreover, it is not the case that there is only one possible lawful approach. That is wrong in the light of authorities such as R v Monopolies and Mergers Commission, ex p. South Yorkshire Transport Ltd [1993] 1 WLR 23, and is also inconsistent with the broad way in which the subsection is worded.  It would mean that whenever Monitor modifies its guidance or policy, for example, to take account of new ways in which private charges might be imposed or to reflect fairly upon representations that have been made to it by interested parties, it is necessarily conceding that its previous policy must have been unlawful. 
67.	In Monitor’s submission the premise of the claim is that the court will substitute its own judgment for that of Monitor, as to how Monitor conscientiously decides to approach its statutory objective of ensuring that NHS foundation trusts will not derive a greater proportion of income derived from private charges than in the base year. The logic of the claim is that there is only one permissible approach to applying the legislation, and to identifying income derived from private charges. If Monitor does not adopt that precise approach, it is acting ultra vires. That leaves no room for judgment. The premise also requires, as a matter of logic, that if Monitor adjusts its guidance, then that in itself is a demonstration of straightforward illegality, because there is only one right way of applying the legislation. Nor does it leave any room for consultation with affected parties.
SUBMISSION OF FOUNDATION TRUST NETWORK
68.	The Foundation Trust Network is supportive of Monitor’s position.  It acknowledges that, under sub-section 43 (2), authorisation must secure that the principal purpose of an NHS foundation trust is the provision of goods and services for the purposes of the National Health Service in England; and under section 43(3) other activities may be carried out for the purpose of making additional income available in order better to perform the sub-section (2) principal purpose.  It submits that there is no evidence that Monitor’s approach, its adherence to option 1, and now option 2, has in any way jeopardised the purposes in these companion provisions.  In its response to Monitor’s consultation it explained that after four years of NHS foundation trusts, and an existing 105 such organisations, there was no evidence to show that NHS foundation trusts had limited NHS service provision in order to expand services to private patients. Indeed, the evidence showed that they had used services to private patients as a way to invest back into improving and widening services to NHS patients.
69.	Moreover, in its response to the consultation the Foundation Trust Network sought to demonstrate the detriments which would flow from the introduction of option 2.  If it is right that option 2 goes too far it must follow that option 3 is unacceptable.  Thus, in the Foundation Trust Network’s submission, Monitor was correct in taking into account the practical difficulties and clear disadvantages attached to option 3, including a deleterious impact on the level of resources available for NHS care.  The Foundation Trust Network agrees with Monitor that it is wrong in principle to seek to divine one single correct approach to the relevant provisions of the 2006 Act, including section 44. There are a range of reasonable correct approaches, including option 1 and option 2. Option 3 or something close to it is certainly not the only legally permissible approach in law and practice.  The uncomfortable consequences of the adoption of different options must be taken into account.  
70.	The starting-point is section 43(2) and (3), which provisions indicate in broad terms the policies and objects of Monitor’s authorisations. The principal purpose of an NHS foundation trust is the provision of goods and services for the purposes of the NHS.  NHS foundation trusts may carry out subsidiary activities for the purpose of making additional income available for the better performance of that principal purpose. The Foundation Trust Network submits that the evidence before the court demonstrates that NHS foundation trusts are altogether loyal to these provisions.  As a matter of statutory construction the only constraint in sections 44(2) and (4) is to be found in the verbal phrase ‘derived from’. Elsewhere in the provisions, the statutory language deployed is open-textured and judgemental: for example, ‘with a view to securing’ in sub-section (2), and the partial, exclusionary definition of ‘private charges’ in sub-section (4). 
71.	The core submission of the Foundation Trust Network is that in applying section 44 Monitor is susceptible to review on irrationality and not a precedent fact basis.   Monitor has clearly explained why, in its estimation, the implementation of option 3 or anything close to it would create unwarranted and unnecessary practical difficulties in ascertaining and allocating monies for accounting purposes. Further, in its representations to Monitor opposing option 3, the Foundation Trust Network pointed out that Monitor’s definitions must be simple and auditable, and referred to the practical difficulties which would flow from the imposition of option 3, as well as the deleterious impacts on the NHS more widely.
IS OPTION 2 LAWFUL?
72.	Option 2 is detailed above.  It catches within the cap income from the provision of healthcare and ancillary services to private patients by NHS foundation trusts themselves.    Beyond that its underlying rationale is to focus on the nature of the entity earning the income, and the degree of control which the NHS foundation trust has over it.  Thus income falls within the cap if an NHS foundation trust derives it from an unincorporated joint arrangement with a third party; a subsidiary where the trust has dominant influence; a joint venture, where the trust has a long-term interest and shares control; or an associated company, where the trust holds a participating interest and exercises significant influence.  
73.	Excluded from option 2 is income from charges, in particular, for the provision of facilities, goods or services to the providers of private healthcare.  That exclusion operates even if such facilities, goods or services are provided solely and exclusively for the purpose of facilitating the levying by the private healthcare provider of private charges on patients.  Also excluded from option 2 are donations from charities, even when these are derived through charges for the provision of private healthcare by the charity.  (With effect from April 2010, however, the manual will require income from charities which are under the control of an NHS foundation trust to be included.  Explained above was the one year grace period granted by HM Treasury in relation to charities).  Thirdly, investment income is excluded in option 2, if the NHS foundation trust has a limited influence or an interest which is not long term in the body in which the investment is held. 
74.	The main issue for me is whether Monitor’s adoption of option 2 for application by NHS foundation trusts, is lawful.  It is not whether option 3 or some blend of options 2 and 3 would satisfy the legislative scheme.  In my view the answer lies in an interpretation of the cap provision of the 2006 Act in its statutory context and against the background of the relevant case-law.  There is no need to refer to the quite different statutory provisions related to NHS trusts or to Hansard.  As I explain, the issue of what the statute means is one for the court, although Monitor is left with an area of discretionary judgment in the application in practice of the correct meaning of the statutory concept.  
The statutory context
75.	The construction of the concept “income derived from private charges” in section 44(2) must begin with section 43(1), which contains Monitor’s power to authorise an NHS foundation trust to provide goods and services.  Under section 43(2) that authorisation must secure that the principal purpose of NHS foundation trusts in providing goods and services is NHS purposes.  Section 43(4) is more specific: Monitor’s authorisation may require the provision of goods and services by the NHS foundation trust, wholly or partly for NHS purposes, framed in the various ways set out in sub-section (7), to which reference has been made.  
76.	Section 44 then turns, as the title “private health care” indicates, to the provision of goods and services by an NHS foundation trust for non-NHS purposes.  Section 44(1) contains Monitor’s power to restrict this.  As with section 43 the means of doing this is set out in section 44(2), by operation of a cap on the income of the NHS foundation trust derived from private charges.  That, as has been seen, is a proportional cap on income measured against a base financial year.  
77.	It seems to me that this statutory scheme has a number of implications.  First, the central purpose of the cap is to ensure that the principal activity
of NHS foundation trusts remains their core function of providing healthcare to NHS patients.  The concept of income derived from private charges must be given an interpretation by reference to that statutory purpose.  And secondly, Monitor has a duty, not just a power, to secure the objective identified in section 44(2). The cap operates as a legislative constraint on Monitor's discretion, which would otherwise be broad.  A direction remains; section 44(2) does not impose an absolute obligation to achieve a result.  The terms of section 44(2) are nonetheless specific, in contrast to Monitor's general duty under section 32 to exercise its functions in a manner consistent with the performance by the Secretary of State of his duties.  
The private patient cap
78.	There is then the statutory expression of the cap itself.  The definition of "private charges" does not cover all charges for goods and services, but only charges in respect of goods and services which are provided to patients, who are not "being provided with goods and services for the purposes of the health service", in short, private patients.  Significantly, section 44(1) does not provide for the restriction on the provision of goods and services by an NHS foundation trust directly to private patients; it provides for that type of restriction in general.  To my mind it follows that section 44 does not require that to come within the cap the charges must be imposed, or the services provided, by an NHS foundation trust itself, or even an associated entity.  What matters is that income should be received which is derived from such charges.  So what does this concept of income derived from private charges entail?
79.	The concept of income being derived from a particular source has a legal pedigree.  Those using the concept in section 44 of the 2006 Act, or at least its predecessor in the 2003 Act, were not starting with a blank sheet.  The case-law referred to earlier establishes that the concept demands an inquiry into the real, rather than the immediate, source of the income.  That may not be the fund or place from which the income immediately flows.  Inquiry may need to go beyond that to the real source or origin of the income.   
80.	So there is no basis for limiting the application of the concept – income    derived from private charges – to income obtained directly from private patients in respect of the provision of goods and services to them, rather than income derived from the provision of goods and services to a separate entity which itself provides these to private patients.  Where an NHS foundation trust receives income from a transaction which does not itself involve the imposition of charges for the provision of goods and services to private patients it is necessary to examine, as the court put it in Zim Properties Ltd v Procter (1985) STC 90, the reality of the matter, conscious that the inquiry may need to go beyond the immediate source of the income.    
81.	Examining the reality of the matter to identify the derivation of income is in my view a pragmatic exercise.  It certainly looks to substance rather than form.  But it does not require some endless tracing exercise along a chain of increasingly remote or fanciful connections, or an inquiry into a limitless number of further transactions to uncover, somewhere down the line, whether income has been derived from private patient charges.  
82.	Moreover, the regulator, Monitor, has a discretion as to the manner in which it exercises its powers with a view to ensuring that the cap is not exceeded. Provided it adopts the correct legal approach to the concept of income derived from private charges, it is entitled to adopt sensible approximations and assumptions where precise measures of private patient income are difficult to achieve.  Matters of detail are left to the body entrusted by Parliament with the task.  In this case the judgment will involve a consideration of the accounting and practical difficulties in determining the realities of where income has been derived.  Judgment must be brought to bear, and lines drawn, in the application of this concept in practice.  There may be reasonable disagreement about how that is done.   
83.	If there is no one right answer, neither is the court limited to review on irrationality grounds.  The legislation confers an area of discretionary judgment but Monitor must in the first place adopt the correct legal approach.  It follows that I do not accept the analysis proffered by Monitor and the Foundation Trust Network of R v Monopolies and Mergers Commission, ex p. South Yorkshire Transport Ltd [1993] 1 WLR 23; Moyna v Secretary of State for Work and Pensions [2003] UKHL 44; [2003] 1 WLR 1929; and R (on the application of T-Mobile (UK) Ltd v Competition Commission [2003] EWHC 1555 (Admin).  It is noteworthy that the court in each of those cases decided the meaning to be given to the relevant statutory concept.  In the South Yorkshire Transport Ltd it was, in Lord Mustill’s words, a matter of “eliminating inappropriate senses of substantial” after which point the court recognised that the decision-maker could substitute its own judgment on the precise application of that test to the particular facts.  In Moyna, Lord Hoffmann invoked Lord Reid’s insistence that the meaning of words in legislation is a matter of law.   In that case, however, it was within the bounds of reasonable judgment for the tribunal to have come to the conclusion it did on the standard of mobility abilities required by the cooking test to obtain the welfare benefit in that case.  In T-Mobile Moses J held that the statutory language required all reasonable demands to be met but that whether demands were reasonable was a matter for objective judgment.  So, too, in this case: it is a matter of law what the concept “income derived from” means. 
Monitor’s decision
84.	Nowhere in the background material to Monitor’s decision in favour of option 2 does there appear to be any real consideration of the statutory concept of income derived from private charges.  The focus of the board meetings on the 29 October and 26 November 2008, the letter to the Department of Health on 3 November and the consultation response of 12 December 2008 was on option 3 and what were said to be its unworkability and adverse consequences.  The consultation response of 12 December mentions legal argument, but those of Unison favouring option 3, not those supporting option 2.  Control over other entities seems to have been the major concern, both in identifying those bodies from where income flows would be subject to the cap, and in highlighting in its absence the problems of obtaining the necessary information from an entity to account for a proportion of the income which relates to private patient charges.  
85.	In as much as the decision in favour of option 2 is concerned the basis seems to have been that option 1 could be said to be too permissive, option 2 was a logical extension of option 1, and option 2 addressed the concerns raised by respected voices in the consultation that there was no good reason to treat subsidiaries, associates and joint ventures differently.  Whether option 2 fitted with the statutory concept does not seem to have entered the board’s deliberations, or if it did, it was certainly not at the forefront.  
86.	In my judgment there is no basis in the statutory language for option 2 to limit, as it does, the application of the statutory cap so that it only applies to income deriving from the provision of NHS foundation trust services, staff or facilities to a separate entity over which the NHS foundation trust has control.  Properly interpreted the concept of “income derived from” means that any income from an intermediate structure, interposed to perform private work in this way, is caught by the cap.  That accords with the “reality of the matter” (the phrase invoked by Warner J in Zim Properties) and the statutory purpose, that the core function of NHS foundation trusts is providing healthcare to NHS patients.  For the same reasons income may be derived from private charges even though not arising from the provision of goods and services directly to patients: when an NHS foundation trust provides goods and services to a private healthcare entity, the “reality of the matter” may be that the income stream accruing to the trust is being derived from private charges.  
87.	That Monitor’s adoption of option 2 does not accord with the need to address the reality of the matter or the statutory purpose is evident by taking some simple examples.  It is accepted on all sides that the cap applies to income derived from private treatment given on the premises of an NHS foundation trust by its staff.  Recognising the reality of the matter means that it must also apply when this happens, but the arrangement is legally structured so that private patients contract with an entity not caught by option 2, and the money remitted to the NHS foundation trust is accounted for as rent, the price of services or a charitable donation.  In not classifying this income stream as caught by section 44(2), option 2 is focussing narrowly on its immediate source rather than on, as the authorities put it, its origin.  
88.	Similarly with investments.  Option 2 accepts that income must be brought within the cap if it derives from a company in which an NHS foundation trust “holds a participating interest and exercises significant influence”.  Income from an investment is, however, excluded where it is an entity in which the NHS foundation trust has limited influence or an interest held not for the long term.  Yet that produces the result that if an NHS foundation trust buys a 50 percent stake in a private hospital the income it receives from that investment will be derived from private charges, but if instead it buys a 5 percent stake in a chain of 10 private hospitals the investment income escapes the cap.  In my view, applying the correct meaning of the statutory concept, the answer to the question whether the income was derived from private charges would be the same in both cases.  There is no justification in the concept “income derived from” for giving a different answer based on the degree of control which the NHS foundation trust has over the investment.  
89.	The third example is the NHS foundation trust manufacturing a medicinal product and selling it to a private hospital for use with its patients.  The income must count towards the cap because the payment to the trust by the  private hospital is derived from the onward sale of the product to its patients, which involves the imposition of private charges in respect of that product.  
90.	None of this is to suggest that there are not more difficult cases which may require an exercise of judgment by Monitor.  In the last example the private hospital might do some sub-contracted NHS work; the purchaser of the medical product may be an NHS trust hospital with a private wing; the NHS foundation trust may sell the product to a wholesaler and not know who the end-user will be; or the trust may not sell the drug, but licence the intellectual property to a pharmaceutical company in exchange for royalties.  Determining the reality of the matter is not a tracing exercise.  Unless at the time of the transaction the only genuine or real prospect is use by the purchaser of the medical product or intellectual property rights to generate private patient income, Monitor may well decide that income from the transaction is not derived from private charges.  Similarly, Monitor may be justified in setting a de minimis threshold, or permitting the use of high-level approximations. As long as it applies the statutory test, as set out in this judgment, these matters are within Monitor's discretion. 
The Hansard material
91.	The rival contentions in this case about the Hansard material underlines the danger of resorting to it except when absolutely required under Pepper v Hart [1993] AC 593.  Not only must the context of the remarks of the Minister or promoting parliamentarian be fully appreciated, in this case, the need to persuade an opposition number on the standing committee to withdraw amendments, on the basis that what she proposes is already covered by the existing clauses of the bill.  There are also the difficulties of interpreting what the minister or promoting parliamentarian means which can result, as in this case, in the focus moving from understanding the language of the legislation as enacted to attaching a meaning to the language of debate.  Thirdly, legislation is the product of a process and at the end of it a democratic assembly as a whole enacts it.  Thus what is said at one point in the process need not necessarily coincide with the parliamentary intention at the end (if ever that could be divined).
92.	The preconditions for resort to Hansard are not met in this case.  In my view the legislation is not in the least ambiguous.  If it had been necessary, however, I would have concluded that Unison’s case has more support from what the Minister said than Monitor’s.  Monitor contends that in the first extract the Minister indicated that the key question would be whether the act in question would cause an adverse effect on NHS services, a reference it is said to the provisions relating to the guarantee of NHS service provision, and that he was speaking of what it would be reasonable to expect the independent regulator to restrict, a phrase which recognised the need for judgment and appreciation.  
93.	But in the second extract, Mrs Calton MP was being assured that the income of an NHS foundation trust which must be counted towards the cap on income deriving from private charges would include income which, to use the words of her proposed amendments, was “from private practice received … whether directly or from bodies or persons undertaking or managing private practice in conjunction with that NHS foundation trust or from premises owned by that NHS foundation trust”.  The Minister, Mr Hutton MP, assured Mrs Calton only that such income would be caught by what is now section 44.  He did not opine on what other income might also be caught.  What he said cannot be taken to narrow the cap to cases in which the bodies or persons providing the income to the NHS foundation trust are undertaking or managing private practice in conjunction with it, or from premises owned by it.
Statutory interpretation and consequences
94.	There is a strong authority that a court may have some regard to consequences in interpreting legislation.  Thus if one interpretation produces injustice, inconvenience or absurdity, and another does not, a court is more likely to adopt the latter.  But to be set against this authority are the cases where courts have said that the Parliamentary intention must be given effect despite what are said to be the injustices and absurdities which flow.  In some cases that approach follows because a court can detect no plausible alternative interpretations open on the statutory language, but equally some courts have adopted the approach that it is not for them to take responsibility for ameliorating the practical consequences which the legislation yields.  
95.	It is not necessary for me to attempt a rationalisation of what may be these different approaches since in my judgment the consequences of a finding that option 2 is unlawful are neither unjust nor absurd.  Monitor must look beyond the immediate source of the income to uncover the reality of its derivation, but that does not mandate an endless tracing exercise.  As I have held, Monitor as the regulator has a discretion as to the manner in which it exercises its powers “with a view to” ensuring that the cap is not exceeded and is entitled to adopt sensible approximations or assumptions where precise measures of private patient income are difficult to achieve.
96.	The Foundation Trust Network has advanced a number of case studies which it submits illustrate the very real problems which have been caused by moving away from option 1 and also how option 3 would adversely affect the future development of the NHS.  It seems to me that much of this evidence is directed more at raising policy issues around the nature of the cap or indeed whether there should be any kind of cap at all.  That, however, is of no relevance to my task.  In the consultation exercise Deloittes’ preferred option was option 2, with an element of option 3: it did not consider, in relation to investments, that this would be impractical.  Moreover, before the court the Secretary of State’s evidence contests the practical difficulties and adverse consequences which the Foundation Trust Network contends would result should Monitor move away from option 2.  The upshot is that I am not persuaded that anything other than option 2 is unworkable or will produce unjust, inconvenient or absurd consequences.  
RELIEF 
97.	Unison is correct that Monitor has misdirected itself in law in applying the cap on private patient income.  If Monitor was wrong in adopting option 2, then a fortiori its use of option 1 was also flawed.  But in my discretion I refuse to grant any relief in relation to Monitor’s operation of option 1.  Although there was no evidence before the court one way or the other, it seems sensible to assume that the accounts for most NHS foundation trusts for 2008/09 and earlier years are closed or near completion and that it would be unduly disruptive, and a waste of public resources, to unravel them and have them recalculated.  Moreover, Unison did not challenge option 1 until 2008, when it had been applied for a number of years.  Unison’s remedy is therefore confined to a declaration that the adoption of option 2 on 26 November 2008 was unlawful
CONCLUSION   
98.	Monitor's decision to adopt option 2 as to the application of the statutory cap on private patient income for NHS foundation trusts was wrong in law. Option 2 does not reflect the intention of Parliament, as expressed in the legislation.  There is a statutory context and legal pedigree to the concept used, “income derived from” in this case, which determines its meaning.  That does not lead to this judgment endorsing option 3, Unison’s preferred approach.  Monitor will need to consider whether that option accords with the correct meaning of the statutory concept of income derived from private patient charges.  It may be that there is a workable intermediate option, as the Secretary of State contends, which does reflect the intention of Parliament.  Again that is for Monitor’s consideration.  The Department of Health has said that some reform to the cap is desirable. During the course of the hearing the court was informed that the government is committed to conducting a review of the cap.   If there are particular aspects of my interpretation of the cap which cause practical difficulties, I take comfort that they can be raised and, if appropriate addressed, in the course of that review.  But as to the cap presently set out in the legislation, Monitor in my judgment has not applied it lawfully.