Revenue and Customs Commissioners v L I F E Services Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 December 2017 |
| Neutral Citation | [2017] UKUT 484 (TCC) |
| Date | 18 December 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 0484 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Mann, Judge Timothy Herrington
Jonathan Davey QC and Natasha Barnes, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Jonathan Bremner, Counsel, instructed by Essential VAT Services Ltd, appeared for the respondent
Value added tax – Exemption for welfare services in VATA 1994, Sch. 9, Grp. 7, item 9 – Whether item 9 incompatible with the Principal VAT Directive 2006/112/EEC, art. 132(1)(g) – Whether legislation can be given a conforming construction – Whether taxpayer a state regulated private welfare institution and therefore entitled to the exemption.
The Upper Tribunal (UT) overturned the decision of the First-tier Tribunal (FTT) in finding that the FTT had erred in law in holding that the UK exemption for welfare services was incompatible with EU law and breached the principle of fiscal neutrality.
L I F E Services Ltd (LIFE) is a profit-making private organisation providing day care services for adults with a range of disabilities. It is approved and registered with Gloucestershire County Council to provide the services on its behalf and is paid by the council to do so.
HMRC ruled that LIFE's supplies were subject to Value added tax (VAT) at the standard rate, contrary to the taxpayer's belief that it supplied exempt welfare services falling within the terms of VATA 1994, Sch. 9, Grp. 7, item 9 as 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 services. The UK law was derived from art. 132(1)(g) of EC Directive 2006/112, the 2006 VAT directive, which exempts “the supply of services and goods closely linked to welfare and social security work, including those supplied by old people's homes, by bodies governed by public law or by other bodies recognised by the member states concerned as being devoted to social well-being”.
The FTT heard the taxpayer's appeal against HMRC's ruling and found that although LIFE was neither a charity nor a public body the appeal should nevertheless be allowed on the basis that item 9 was incompatible with the 2006 VAT directive by recognising, as exempt from VAT, supplies made by charities but not those made by LIFE.
The FTT considered that if item 9 merely specified that certain types of body were entitled to the exemption, rather than bodies devoted to social welfare, then it was open to the challenge that it breached fiscal neutrality because it did not provide that the categories of establishments governed by private law referred to in the directive should be subject to the same conditions. The FTT concluded that by recognising charities and not recognising LIFE, item 9 offended the principle of fiscal neutrality with the consequence that LIFE's services were exempt.
Upon appeal, the UT considered whether item 9 was compatible with art. 132(1)(g). HMRC advanced four grounds of appeal, that the FTT had erred:
- in adopting an overly restrictive interpretation of the phrase devoted to social well-being in art. 132(1)(g);
- in concluding that item 9 was incompatible with art. 132(1)(g) because it entitled bodies to the exemption without regard to whether they were devoted to social well-being;
- in disapplying item 9 without first considering whether the legislation could be given a conforming construction; and
- in how it applied the concept of fiscal neutrality to item 9.
In considering the compatibility issue, the UT found that the FTT had erred in its analysis. It concluded that the correct position lay in one of two analyses, both of which determined the appeal in favour of HMRC. The first assumed the correctness of the FTT's conclusion that many charities were not “redolent of social welfare”. Contrary to the assumption of the FTT, this did not mean that all charities would have the benefit of the exemption. Only those whose objects included welfare activities could properly supply them. This analysis underpinned HMRC's position on the second ground of appeal. The second analysis was one which was embodied in HMRC's first ground of appeal. This considered how a charity qualifies as charitable in English law and how that interacts with the phraseology of art. 132(1)(g). The phrase “services … closely linked to welfare” in art. 132(1)(g) had been given a broad interpretation in case law and the phrase “devoted to social well-being” in the same article embraced all entities which worked to enhance the well-being of society. On this analysis a charity could be regarded as a body devoted to social well-being for the purposes of the article. In the judgment of the UT, The FTT had erred in finding that some charities were not “redolent of social welfare”. In this alternative, the UT accepted ground 1 of HMRC's appeal.
Having thus decided, it became necessary for the UT to consider whether in making the choice that it had in limiting the exemption for private bodies who are not state-regulated to charities and not extending it to other non-charitable bodies, such as LIFE who provide similar services, the UK had breached the principle of fiscal neutrality. In particular, the question was whether the distinction between non-regulated non-public law entities on the one hand and non-regulated charities on the other was justified or infringed the principle of fiscal neutrality. Having considered the principles established by the European Court of Justice (ECJ) in Kingscrest Associates Ltd v C & E Commrs (Case C-498/03) [2007] BVC 528, the UT found that the UK had adopted two criteria for determining which non-public law bodies should be entitled to the exemption, namely that the body is regulated and that it is a charity. For LIFE to be able to claim that its exclusion from the class breached the principles of fiscal neutrality it was required to demonstrate that it satisfied one of those two criteria. It was unable to do so.
LIFE put to the UT an additional argument that it was a state-regulated private welfare institution or agency and therefore exempt pursuant to item 9(b). The public Act pursuant to which the council could register or approve LIFE was the Care Act 2014. However, in the opinion of the UT, the provisions of that legislation did no more than impose duties on the relevant local authorities to provide the relevant services and give it the power to delegate its functions to another person. They said nothing about how the services were to be regulated. LIFE was not a “state-regulated private welfare institution or agency” within the meaning of sub-paragraph (b) of item 9 and could not benefit from the VAT exemption. Accordingly, HMRC's appeal was allowed.
It the light of the UT's conclusions, the question of a conforming construction arising from HMRC's third ground of appeal did not arise. However, if the UT was found to be wrong in its conclusions, then it would have held that the exemption should be construed so as to conform by saying it applied to charities whose objects include devotion to social well-being.
One matter that was not resolved at the hearing was the possible breach of fiscal neutrality arising from the different treatment applied in Scotland and Northern Ireland, whereby bodies located in those devolved nations which make identical supplies to LIFE are able to benefit from exemption because non-residential care services are regulated in those jurisdictions. This apparent discrepancy will be considered by the UT in the pending case of Learning Centre (Romford) Ltd [2017] TC 05946.
[1] This is an appeal by HMRC against a decision of the First-tier Tribunal (“FTT”) (Judge Charles Hellier and Mr William Haarer) released on 23 June 2016.
[2] L I F E Services Limited (“LIFE”) is a profit-making private organisation which provides day care services for adults with a range of disabilities. The FTT allowed LIFE's appeal against HMRC's determination that LIFE's supplies were subject to VAT at the standard rate, contrary to LIFE's contention that its services were welfare services which were exempt for VAT purposes as falling within the terms of item 9 of Group 7 of Schedule 9 (“Item 9”) to the Value Added Tax 1994 (“VATA 1994”).
[3] article 132(1)(g) of the Principal VAT Directive 2006/112/EEC (“PVD”) requires Member States to exempt the following transactions from VAT:
the supply of services and goods closely linked to welfare and social security work, including those supplied by old people's homes, by bodies governed by public law or by other bodies recognised by the Member States concerned as being devoted to social well-being
[4] Accordingly, Item 9 specifies as exempt:
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.
[5] Note (6) to Item 9 defines “welfare services” so as to include “the provision of care, treatment or instruction designed to promote physical or mental welfare of elderly, sick, distressed or disabled persons.”
[6] The basis of the FTT's decision was that although LIFE's supplies did not fall within Item 9 the appeal should nevertheless be allowed on the basis that Item 9 was incompatible with the PVD by recognising, as exempt from VAT, supplies made by charities but not those made by LIFE.
[7] Permission to appeal against the Decision was granted to HMRC on 20 September 2016 by Judge Hellier on the basis that it was arguable that the FTT erred in law:
- by adopting an overly restrictive interpretation of the phrase devoted to social well-being in article 132(1)(g) of the PVD (Article 132(1)(g));
- by concluding that item 9 was incompatible with article 132(1)(g) because it entitled bodies to the exemption without regard to whether they were...
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