Lilias Graham Trust v Revenue and Custom Commissioners
| Jurisdiction | UK Non-devolved |
| Neutral Citation | [2021] UKUT 36 (TCC) |
| Year | 2021 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 36 (TCC)
Judge Swami Raghavan, Judge Guy Brannan
Upper Tribunal (Tax and Chancery Chamber)
Value added tax – Welfare exemption – VATA 1994, Sch. 9, Gr. 7, item 9 – Services directly connected with the care and protection of children and young persons – Exclusion of accommodation in Note 7 – Meaning of ancillary in Note 7 – Whether single exempt supply – Yes – Whether accommodation ancillary – Yes – Appeal dismissed.
The Upper-tier Tribunal (UT) dismissed the taxpayers appeal against a decision of the FTT that their supplies, including accommodation, were exempt welfare services jeopardising input tax sought on the costs of new accommodation.
The UT upheld the decision of the FTT in Lilias Graham Trust [2019] TC 07346 that services provided by LGT were exempt welfare services. LGT had argued the services were subject to VAT to protect input tax incurred in relation to the accommodation.
LGT ran a residential assessment centre where the parenting capabilities of parents referred by local authority social workers were assessed. Families were accommodated on-site in a “typical family home” and observed over a period of weeks. Although the child remained under the supervision of the parent, LGT support staff remained physically in the room with the family, and most families saw one or more LGT consultants who included educational psychologists, play therapists and psychiatrists. A comprehensive report was subsequently prepared. The local authority was charged a fixed, all-inclusive, fee per family.
The central issue before the FTT had been whether LGT's supplies were “directly connected with … the protection of children and young persons” and therefore exempt from VAT under VATA 1994, Sch. 9, Grp. 7, item 9. The FTT concluded they were.
Note 7 of Grp .7 provided that Item 9 did not include the supply of accommodation or catering except where it was “ancillary to the provision of care, treatment or instruction.” LGT contended their accommodation was not “ancillary” and therefore should be excluded from exemption. The FTT found there had been a single composite supply by LGT of residential accommodation and the assessment of parenting capacity. They agreed with LGT the accommodation was an essential part of the supply but that did not mean it could not also be ancillary.
LGT appealed on the following grounds:
- Finding the accommodation was part of a composite supply did not preclude carving it out from the exemption and applying a different tax treatment.
- The FTT, they argued, failed to correctly apply the EU case law to the meaning of ancillary, and should not have applied a dictionary definition.
HMRC disagreed and argued the FTT were correct to find there was a single supply of welfare services, in which case Note 7 did not even become relevant since there was then no “supply” of accommodation just the single supply of welfare services.
The UT considered the scope of the circumstances in which national legislation may apply different tax treatments to a single supply. A key factor in both cases cited by LGT (Talacre Beach Caravan Sales Ltd v C & E Commrs (Case C-251/05) [2007] BVC 366 and EC Commission v France (Case C-94/09) [2010] BVC 1,237) was that European legislation had specifically granted member states the ability to derogate from a general provision, whereas in this case the exemption was mandatory under art. 132 of the Principal VAT Directive (Directive 2006/112). Taking this into account the UT found the reference to supply in Note 7 could not be interpreted to capture a supply which is itself an element in a single supply for VAT purposes.
On the meaning of “ancillary” in Note 7, the UT agreed with HMRC that Note 7 did not incorporate the definition given in the decision of Card Protection Plan Ltd v C & E Commrs (Case C-349/96) [1999] BVC 155 which it pre-dated. But also, under this definition, if the accommodation was essential to the provision of care, rather than just ancillary to it, it would fall outside the scope of the exemption. There was no apparent rationale for this view, which would be inconsistent with art. 134 requiring that member states only exempt supplies essential to the exempt welfare services. On the contrary it made sense Note 7 would seek to exclude accommodation or catering unworthy of exemption when it was not ancillary to such care in the sense of not being essential to the care.
The meaning of ancillary in Note 7 was, effectively, the one taken from the dictionary by the FTT which referred to “providing essential support”.
Appeal dismissed.
The irony, in this case, is that the taxpayer was originally required by HMRC to register for VAT and even suffered a late registration penalty but, having developed their services, the nature of their supplies changed leading to this reassessment of the liabilities from a VAT perspective. It therefore highlights the need for all businesses and organisations to keep their activities under review and recognise the impact any changes may have.
It may also be of some interest to anyone considering a “carve-out” as it also appears to confirm the limited scope of Talacre Beach Caravan Sales Ltd v C & E Commrs (Case C-251/05) [2007] BVC 366 (and EC Commission v France (Case C-94/09) [2010] BVC 1,237) as previously expressed by HMRC.
Leslie Allen and Richard Harvey, instructed by Mishcon de Reya LLP appeared for the appellant
Natasha Barnes, counsel, instructed by the General Counsel and Solicitor to HM Revenue & Customs, appeared for the respondents
[1] The Lilias Graham Trust (“LGT”) is a charity. It provides a residential assessment centre where it assesses the parenting capacities of those referred to it by a local authority in return for a fee charged to that authority. LGT appeal, with the permission of the First-tier Tribunal (“FTT”), against a decision of the FTT issued on 10 March 20201 (“the FTT Decision”).
[2] The FTT held, contrary to LGT's case, that LGT's supplies were exempt supplies of “welfare services” under Item 9, Group 7 Schedule 9 of the Value Added Tax Act 1994, being directly connected to the care or protection of children. LGT accept that conclusion and do not seek to appeal it. Instead, LGT's appeal concerns its alternative case. That centred on the exception to the exclusion to exemption in Item 9 as provided by Note 7 to Group 7 (“Note 7”). Note 7 provides that Item 9 does not include the supply of accommodation or catering except where it is “ancillary to the provision of care, treatment or instruction”. The FTT rejected LGT's argument that the accommodation was outside the scope of the Note 7 exclusion. It found the provision of accommodation was ancillary to the provision of care for the purposes of Note 7 and therefore exempt. LGT's motivation to argue that the supply of the accommodation is standard-rated rather than exempt is the significant amount of input tax which arises in relation to the accommodation.
[3] The relevant UK legislation implements provisions of Council Directive 2006/112/EC Principal VAT Directive (“PVD”). Although LGT's position is that the UK implementation of the exemption faithfully transposes the PVD provisions, we set the Directive provisions out because they are relevant to the parties' submissions and because they inform the construction of the UK provisions.
[4] Article 131 provides:
The exemptions provided for in Chapters 2 to 9 shall apply without prejudice to other Community provisions and in accordance with conditions which the Member States shall lay down for the purposes of ensuring the correct and straightforward application of those exemptions and of preventing any possible evasion, avoidance or abuse.
[5] Article 132(1)(h) of the PVD then provides in relation to welfare services:
1. Member States shall exempt the following transactions: …
- (h) the supply of services and of goods closely linked to the protection of children and young persons by bodies governed by public law or by other organisations recognised by the Member State concerned as being devoted to social wellbeing; …
[6] Article 134 provides the supply of goods “shall not be granted exemption as provided for in points … (h) … where the supply is not essential to the transactions exempted”.
[7] Section 31(1) VATA provides that “a supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9 …”
[8] Item 9 of Group 7 of Schedule 9 VATA, provides exemption for:
The supply by
- a charity,
- a state-regulated private welfare institution or agency, or
- a public body,
of welfare services and of goods supplied in connection with those welfare services
[9] Note 6 of Group 7 then defines “welfare services”:
In item 9 “welfare services” means services...
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The Lilias Graham Trust v The Commissioners for HM Revenue and Customs [2021] UKUT 0036 (TCC)
...[2021] UKUT 0036 (TCC) Appeal number: UT/2020/0053 VAT– welfare exemption – Article 132(1)(h) – services directly connected to the care or protection of children - exclusion in Note 7 Group 7 Schedule 9 VATA 1994 for accommodation for “supply” of accommodation except where it is “ancillary”......