Healthwatch Hampshire C.I.C.
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 April 2017 |
| Neutral Citation | [2017] UKFTT 325 (TC) |
| Date | 19 April 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Philip Gillett, Christopher Jenkins
Michael Conlon QC, instructed by PKF Francis Clark with Princecroft Willis, appeared for the appellant
Isabel McArdle, of Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Local Healthwatch Organisation – (1) Whether carrying on an economic activity for VAT purposes – Held, yes – (2) Whether a public body for purposes of Directive 2006/112 (the Principal VAT Directive), art. 13(1) – Held, no – Taxpayer's appeal allowed.
The First-tier Tribunal (FTT) allowed the appeal against HMRC's decision that no economic activity was being carried on. The FTT held that there was a normal commercial contract, under which consideration was paid for services supplied.
The dispute concerned whether a Local Healthwatch Organisation (“LHO”) carried on an economic activity when it performed Healthwatch services under a contract with a local authority (“LA”). Healthwatch is the name given to the provision of an independent consumer champion for health and social care. It operated at two levels: nationally, through Healthwatch England and locally, through Local Healthwatch Organisations.
Revised arrangements for Healthwatch were introduced by the Health and Social Care Act 2012, by amending the Local Government and Public Involvement in Health Act 2007 (“LGPIHA”), from 1 April 2013, and replacing the system of local involvement networks. Under these revised arrangements, local authorities, including HCC, must enter into contractual arrangements with a body corporate, which was required to be a social enterprise and a Community Interest Company and to fulfil certain other criteria. In 2013, in anticipation of the revised arrangements, a consortium was set up with the aim of forming a new company, Healthwatch Hampshire CIC (“HH”), as a social enterprise company, which would bid for the Healthwatch activities for HCC. HH was a company limited by guarantee, but was not a charity. However, it was non-profit making in its objectives, and any profits can be spent only for the benefit of the local community.
A contract (“the HCC Contract”) was signed between HCC and HH on 23 August 2013. HH sub-contracted some of those services to Help and Care (“H&C”), a VAT-registered company and a registered charity whose objects included assisting in the care and welfare of the elderly and sick. H&C had been involved in public involvement in health since 2003 and in Healthwatch since 2013. Certain other elements were sub-contracted to Citizens Advice Hampshire (“CitAH”) by a sub-contract dated 2 December 2015, but these elements were later added to the sub-contract with H&C.
H&C was VAT registered. HMRC and H&C agreed that the services provided to HH under the sub-contract are subject to VAT. Thus, if HH could not register for VAT, it would be unable to recover the VAT charged on the sub-contract. By contrast, if HH charged VAT on its charges to HCC, HH could recover the VAT suffered on its charges from H&C and HCC could recover any VAT suffered in full under Value Added Tax Act 1994 (VATA 1994), s. 33.
HH registered for VAT based on its understanding that the charges it made to HCC were consideration for a taxable supply. Thus, initially HH added VAT to its charges and accounted for this to HMRC. Initially, H&C also based its VAT accounting for the sub-contract on the same understanding. Consequently, H&C charged HH VAT. In discussions between HMRC and the Chartered Institute of Public Finance and Accountancy (“CIPFA”) in 2013, the view was expressed that “local authority funding to LHOs for carrying out statutory activities” was “outside the scope” of VAT. On 27 June 2014, HMRC wrote to HH adopting this view and requiring HH to correct the accounts. HMRC saw the situation as being that H&C must account for VAT on its services under the sub-contract, but HH was not making taxable supplies on its contract with HCC, and so could not recover the VAT it suffered on the charges from H&C. This would put HH in financial difficulties.
The FTT considered the following key questions:
1) Did the activities of HH, under its contract with Hampshire County Council (“HCC”), amount to an economic activity, such that it should be VAT registered or were they more correctly described as the performance of public functions or state activities?
2) Is HH a public body for the purposes of Directive 2006/112 (the Principal VAT Directive or “PVD”), art. 13(1) and therefore effectively “outside the scope” of VAT?
3) If it is a public body for the purposes of art. 13(1), is it carrying out its activities as a public body or in some other capacity?
4) If it is a public body for the purposes of art. 13(1) and is treated as carrying out those activities as a public body, would its treatment as a non-taxable person significantly distort competition?
The FTT was assisted as regards what constitutes economic activity for VAT purposes by the judgment in the Court of Appeal in Longridge on the Thames v R & C Commrs VAT[2016] BVC 33, in particular the following matters:
1) there must be a direct link between the services rendered and the consideration received;
2) it is not necessary for the taxpayer to have a profit motive;
3) Directive 2006/112 (the Principal VAT Directive), art. 9 states that a taxable person is a person who carries on any economic activity, whatever the purpose of that activity; and
4) if a person supplies goods or services “for consideration”, i.e. satisfying the test of direct link referred to in (1) above, and the activity is “permanent”, then there is a rebuttable presumption, or a general rule subject to possible exceptions, that the supply for consideration is an economic activity (para. 26 of the decision).
Looking at (4) above in particular, the FTT considered the contract between HH and HCC to be a normal commercial contract, under which consideration was paid for services supplied, thus satisfying the direct link test referred to in (1) above. Given the relatively permanent nature of the contract, there was a rebuttable presumption that the supply of those services was an economic activity (para. 27 of the decision).
HMRC argued that the services were “state activities” and as such could not be economic activity (para. 33 of the decision). However, the FTT held that, just because activities are activities of the state, that does not mean that they cannot constitute economic activity (para. 43 of the decision).
Alternatively, HMRC argued that HH was a public body within Directive 2006/112, art. 13(1), as it fell within the definition of being an “other bod[y] governed by public law” and therefore should “not be regarded as [a] taxable person in respect of the activities or transactions in which [it] engages as [a] public authorit[y], even where [it] collects dues, fees, contributions or payments in connection with those activities or transactions.”
The FTT considered the final sentence of art. 13(1), which was that “where [public bodies] engage in [economic activity], they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition …”. The FTT was not presented with any evidence that there was an extensive market in providing Healthwatch services and, since these contracts were stated to be exclusive to a local authority area, there was no question of any competition within a local authority area once a contract has been made.
The FTT held that the treatment of an LHO as being non-taxable would lead to significant potential distortions in competition. Therefore, even if HH was held to be subject to public law, it should still not be treated as a non-taxable person, because of the potential distortion of competition which such treatment would cause (para. 64 of the decision).
Thus, in allowing the appeal against HMRC's decision, the FTT decided that:
1) the activities of HH amounted to economic activity and not the performance of public functions or state activities, and therefore it must register for and account for VAT on the supplies it makes;
2) it is not a public body for the purposes of art. 13(1); and
3) even if it were a public body, its activities were not being performed in its capacity as a public body; and
4) if it were a public body and its activities were considered to be carried out as a public body, its treatment as a non-taxable person would lead to significant distortions of competition.
Healthwatch Hampshire (HH) was a social enterprise and community interest company established to provide services to the local authority, principally of promoting local health services, procuring patient feedback and reporting thereon. The issue for the FTT in this case was whether HH's services constituted an economic activity rather than public functions or state activities. HMRC argued that there was no economic activity which meant HH ought neither to have charged output VAT on its services to the local authority nor recovered input VAT on the services it had sub-contracted to another company. The FTT held the services were an economic activity and also examined HMRC's secondary argument that HH was a public body finding that it was not but even if it was, it was entitled to be treated as a taxable person as its treatment as a non-taxable person would lead to significant distortions of competition.
[1] This Appeal concerns whether a Local Healthwatch organisation (“LHO”) is in business for VAT purposes when it performs Healthwatch services under a contract with a local authority (“LA”).
[2] Healthwatch Hampshire C.I.C. (“HH”) appeals against a decision on a review by HMRC dated 11 November 2015 which upheld a previous HMRC decision dated 29 June 2015.
[3] The key questions to be determined by...
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Colchester Institute Corporation
...be interpreted consistently with the concept of economic activity as used in article 9(1) (see for example Healthwatch Hampshire C.I.C. [2017] TC 05803 at [21]); and Paragraph 5(4) must be interpreted consistently with article 26(1) as interpreted in VNLTO by the ECJ. [104] Therefore, submi......