18975
VAT — construction company — construction of mental nursing home — supplies of construction services zero-rated on certificate of home operator as being for relevant residential purpose — whether Commissioners in error in making determination based on actual use of home and, if so, whether assessment to best judgment — whether intended use for relevant residential purpose or excepted  therefrom by note (4) to Group 5 Sch 8 VATA 1994 as relating to a “hospital, prison or similar institution “ — appeal allowed.

MANCHESTER TRIBUNAL CENTRE

 
 	
	FENWOOD DEVELOPMENTS LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

Tribunal:  David Demack	 (Chairman)
				           Arthur Brown FCA	

Sitting in public in York on 19 and 20 January 2005

Andrew Hitchmough of counsel instructed by Lord & Taylor Ltd, VAT consultants for the  Appellant
Nigel Poole of counsel instructed by the Solicitor for the Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2005

DECISION
Introduction
1.	The appellant company, Fenwood Developments Ltd (“Fenwood”), contracted with Pastoral Homes Ltd (“Pastoral”) to construct a mental nursing home to be known as the Dene.  Pastoral certified that it intended to use the Dene for a “relevant residential purpose” within note (4) to Group 5 of Schedule 8 to the Value Added Tax Act 1994 (“the 1994 Act”).  On the basis of Pastoral’s certificate, Fenwood zero-rated its supplies of construction services.  But after the Dene was completed and sold by Pastoral, following a visit by one of their officers, the Commissioners of Customs and Excise concluded that actual use was that of an institution similar to a hospital or prison, or use statutorily excepted from a “relevant residential purpose”, and assessed Fenwood to tax on its services.  The company appeals against the tax assessment made on it, claiming that the assessment was not made to the Commissioners’ best judgment, and was  “also invalid as the certificate accepted by the Appellant in relation to the relevant residential purpose of the Dene was correctly issued”.
2.	In a letter to Fenwood of 7 August 2001, Miss Linda O’Sullivan, the Commissioners’ assessing officer, gave their reasons for not accepting that Fenwood’s supplies qualified for zero-rating, saying:
“Having visited the Dene and discussed its organisation and activities with Ms McCollin I have reached the conclusion that it is an institution  which is both similar to a hospital and similar to a prison.
You may find it helpful if I set out some of the reasoning behind my decision.  This is:
1.	the Dene provides treatment for those suffering from mental health illnesses.  I understand that the goal of the extensive clinical tem is to improve the mental health of the Dene’s patients to such an extent that they can leave and ‘step down’ to less secure units. The ultimate aim of the treatment provided is that as many of the patients  as possible should eventually be able to rejoin the wider community.
2.	It is my understanding that the patients at the Dene have been detained under the provisions  of the Mental Health Act (1983).  My understanding of this Act is that people can be detained against their will in a psychiatric hospital if two doctors (one of whom must be trained in psychiatry) agree that it is necessary.
3.	I have also considered the definition of a hospital as given in the National Health Service Act 1977 (as amended) at Part 4 Section 128  which states the hospital means, amongst other things, any institution for the reception and treatment of persons suffering from illness.  The definition of illness includes mental disorder within the meaning of the Mental Health Act 1983.  I realise that the Dene is not an National Health Service hospital but I consider it falls squarely into the definition of a hospital given in the National Health Service Act.  I think the argument that the Dene is a hospital is strengthened by the fact that all patients are referred by and funded by the National Health Service.
4.	The Dene is an institution which is expressly established and registered to provide treatment for those with mental illnesses.  This leads me to conclude that it is a hospital or, at the very least, an institution which is similar to a hospital.
5.	The Dene is also similar to a prison in so far that it is a place where people can legally be detained against their will.  Patients can only leave with permission.  If a patient escapes the police and a search is made for them until they are found and retuned to secure detention.  The intensity of the search will vary depending on the perceived risk of the patient.
It seems to me that the Dene fails the requirements for zero-rating under two provisions.  The Dene is similar to a hospital and a prison.  I therefore do not accept that the construction of the Dene was eligible for zero-rate relief under the provisions of Group 5 of Schedule 8 to the VAT Act 1994.”
3.	That letter identified three issues on which our decision is required, namely: 
(a)	whether, in determining the taxable status of the supplies of construction services made by Fenwood, the Commissioners erred in considering only the actual use of the Dene following its completion, as opposed to its intended use when Pastoral issued its certificate;
(b)	if the answer to the first issue is in the affirmative, whether the assessment was made to the best of the Commissioners’ judgment as required by section 73(1) of the 1994 Act;
(c)	whether Fenwood’s services were in any event properly zero-rated having regard to the terms of items (2) and (4) of Group 5 of Schedule 8 to the 1994 Act read with note (4) to that Group.
The Facts
4.	We take the facts from an agreed statement of facts and a common bundle of documents, as supplemented by the parol evidence of Mr Philip Marsh, a director of Pastoral at the time the certificate was issued, and Miss O’Sullivan.
5.	Fenwood trades as a civil engineering company, and was known as Graham Fennell Construction Co Ltd until it changed its name to Fenwood in November 2000. 
6.	On 13 April 2000 Fenwood entered into a building contract with Pastoral, a company whose stated mission was to “provide caring forward looking, therapeutically based centres of excellence for people with mental health problems who need longer-term medium secure care in a home and family like environment …”.  The contract was for the construction of a three storey mental nursing home to be known as the Dene at Burgess Hill, West Sussex, providing residential accommodation and care for female patients suffering from mental disorders.  Basically triangular with a number of external spokes, the patients accommodation at the Dene consists of 8 sections or wings, each containing five or six  en-suite single bedrooms, with a common lounge, smoking room and kitchen/dining room.  Pastoral intended each section to be called  a “home”, and to operate as a family unit, with residents doing much of their own cooking, some shopping, sharing meals, domestic tasks, and generally supporting each other.  The Dene is surrounded by a high fence.
7.	Fenwood carried out the required construction work on the basis of a certificate issued by Pastoral on 1 February 2000 pursuant to note 12(b).  The certificate indicated that the construction work was in respect of a building intended to be used for a relevant residential purpose, and, that the construction services qualified for zero-rating for VAT purposes.
8.	Before the construction work was completed, on 9 August 2000 to be precise, Pastoral was taken over by Partnerships in Care Ltd (“PiC”), a subsidiary of General Healthcare Group Ltd  (“GHG”).  The construction work was completed by Fenwood on 23 Mary 2001, and the Dene has since been operated by GHG.
9.	The Dene is registered with the West Sussex Health Authority under section 22 of the Registered Homes Act 1984 (“the 1984 Act”), registration having been effected by PiC on 23 May 2001.
10.	On 18 July 2001 Miss O’Sullivan visited the Dene and discussed its operation with Ms Doreen McCollin, who, we assume, was employed by PiC.  That visit was followed on 4 March 2002 by a visit to Fenwood by two other officers of the Commissioners at which Fenwood was informed that the Commissioners had decided that the construction services provided at the Dene were standard-rated, and that it would be assessed to tax on that basis.  The assessment, for £763,072, followed on 15 March 2002.
11.	Pastoral’s philosophy was one of providing a care-based system to its female patients; its patients were  usually the victims of severe sexual or physical abuse, and it intended them to live as normally as possible.  It took only patients for whom ordinary psychiatric hospitals could do no more, and aimed to provide them with a home, if necessary, for life.
12.	Pastoral typically offered homes to women who had been detained under the terms of the Mental Health Act 1983 (“the 1983 Act”), such detention commonly been known as sectioning.  But being under section was not a requisite of residence at the Dene.  Before admission to a Pastoral home, patients would have been admitted to a hospital for preliminary diagnosis, assessment and treatment.  Treatment they might have received prior to admission to a Pastoral home would have included ECT (electro convulsive treatment), intensive psychological intervention, and regular assessment.  Pastoral did not provide  any diagnostic services, for those for whom it catered could not be treated in the conventional sense.  Essentially it offered accommodation for women who no longer needed, or could no longer benefit from, hospital treatment, e.g. those diagnosed as having personality disorders, a history of self-harm, being labelled as difficult to manage, or having been  socially or educationally deprived.   Pastoral did not accept patients in an acute phase of illness, and any of its patients who needed acute intervention were transferred to hospital for treatment. The accommodation was intended to become their permanent residence for the foreseeable future.  To that end they were invited to decorate it to their own taste, and furnish it.  They were allowed to keep pets.  Short stay patients were not admitted.
13.	Pastoral’s objective was to encourage its patients to live full lives within whatever constraints and limitations their mental conditions necessarily imposed upon them.  It aimed to supply care, rather than specific treatments.  Its model of care was not treatment based.  Residents went out for meals, attended courses outside the Dene in subjects such as computer studies, went horse riding, attended church, sometimes unaccompanied.  To assist them they received allowances similar to pocket money.  Their names were included on the local electoral roll.
The Law  
14.	The VAT legislation in point in the appeal is to be found in Group 5 of Schedule 8 of the 1994 Act, for which schedule section 30 of the Act makes provision.
15.	Item 2 of Group5 of Schedule 8 to the 1994 Act provides that, “The supply in the course of the construction of … a building … intended for use solely for a relevant residential purpose…of any services related to the construction...” shall be zero-rated. Item 4 extends the zero rating to certain building materials supplied in conjunction with the construction services within item 2.
16.	Use for a relevant residential purpose is defined in note (4) to Group 5 as meaning:
“use as – 
(a)   a home or other institution providing residential accommodation  for children;
(b)	a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on  alcohol or drugs or past or present mental disorder;
(c)    a hospice;
(d)    residential accommodation for students or school pupils;
(e)    residential accommodation for member of the armed forces;
(f)    a monastery, nunnery or similar establishment; or
(g)   an institution which is the sole or main residence of at least 90 per cent of its residents,
except use as a hospital, prison or similar institution or an hotel, inn or similar establishment.”
(Throughout  the remainder of our decision, we shall refer to that note as “note (4)”. ).
17.	It is common ground that, were it not for the exception for hospitals, prisons and similar institutions, use of the Dene would be for a relevant residential purpose.
18.	Note (12) to Group 5 provides that:
“Where all or part of a building is intended for use solely for a relevant residential purpose or a relevant charitable purpose—
  (a)  a supply relating to the building (or any part of it) shall not be taken for the purposes of items 2 and 4 as relating to a building intended for such use unless it is made to a person who intends to use the building (or part) for such a purpose; and
   (b)	a grant or other supply relating to the building (or any part of it) shall not be taken as relating to a building intended for such use unless before it is made the person to whom it is made has given to the person making it a certificate in such form as may be specified in a notice published by the Commissioners stating that the grant or other supply (or a specified part of it) so relates.”
19.	Pastoral issued the certificate pursuant to the requirements of note (12)(b).
20.	As counsel for the parties referred to other statutory provisions in the course of their submissions, we find it helpful to set them out at this point in our decision.
21.	First, reference was made to the definition section of the National Health Service Act 1977 (“the 1977 Act”), that is section 128.  From that section, two definitions are in point, those of “hospital” and “illness”.  “Hospital” is defined as  “(a) any  institution for the reception  and treatment of person suffering from illness, (b)  any maternity home, and (c) any institution for the reception  and treatment of persons during convalescence or persons requiring medical rehabilitation and includes clinics, dispensaries and out-patient departments maintained in connection with any such home or institution, and ‘hospital accommodation’ shall be construed accordingly;” and “illness” as including “mental disorder within the meaning of the Mental Health Act 1959 and an injury or disability requiring medical or dental treatment or nursing;” .
22.	Second, the 1983 Act was mentioned.  Section 2 of that Act deals with the admission to hospitals of patients for assessment, and is to be contrasted with section 3 which deals with “Admission for treatment”.  Subsections (1) and (2) of the latter section provide as follows:
 “(1) A patient may be admitted to a hospital and detained there for the period allowed by the following provisions of this Act in pursuance of an application (in this Act referred to as ‘an application for admission for treatment) made in accordance with this section.
 (2) An application for admission for treatment may be made in respect of a patient on the grounds that — 
(a)	he is suffering from mental illness, severe mental impairment, psychopathic disorder or mental impairment and his mental disorder is of a nature or degree which makes it appropriate for him to receive medical treatment in a hospital; and 
(b)	in the case of psychopathic disorder or mental impairment, such treatment is likely to alleviate or prevent a deterioration of his condition; and
(c)	it is necessary for the health or safety of the patient or for the protection of other persons that he should receive such treatment and it cannot be provided unless he is detained under this section.”
23.	 “Hospital” and “medical treatment” are defined in section 145 of the 1983 Act as follows:
	“ ‘hospital’ means –
(a)	any health service hospital within the meaning of the National Health Service Act 1977; and
(b)	any accommodation provide by a local authority and used as a hospital by or on behalf of the Secretary of State under that Act; 
and ‘hospital’ within the meaning of Part II of this Act’ has the meaning given in section 34 above.”
“ ‘medical treatment’ includes nursing, and also includes care, habilitation and rehabilitation under medical supervision:” 
24.	As mentioned earlier, the Dene was registered with the local health authority under the Registered Homes Act 1984 (“the 1984 Act”)  By section 1, to be found in Part I, an institution was required to be registered as a residential care home if it “provides or is intended to provide, whether for reward or not, residential accommodation with both board and personal care for persons in need of personal care by reason of . . . mental disorder”.  Registration as a residential care home was not required in respect of any establishment “which is used or intended to be used solely as a mental nursing home.” (section 1(5)).  Part II of that Act dealt with “Nursing Homes and Mental Nursing Homes”, and included at section 22 the following definition of a “mental nursing home”:
“(1)	 In this Act ‘ mental nursing home’ means, subject to subsection (2) below, any premises used, or intended to be used, for the reception of, and the provision of nursing or other medical treatment (including care, habilitation and rehabilitation under medical supervision) for one or more mentally disordered patients (meaning persons suffering, or appearing to be suffering, from mental disorder), whether exclusively or in common with other persons.
(2)	In this Act, “mental nursing home” does not include any hospital as defined in subsection (3) below, or any other premises managed by a government department or provided by a local authority.”
25.	The 1984 Act was repealed by the Care Standards Act 2000 (“the 2000 Act”), section 3 of the latter dealing with “care homes” in the following terms:
“(1) For the purposes of this Act, an establishment is a care home if it provides accommodation, together with nursing or personal care, for any of the following persons.
	(2) They are
(a)	persons who are or have been ill;
(b)	persons who have or have had a mental disorder;
(c)	persons who are disabled or infirm;
(d)	persons who are or have been dependent on alcohol or drugs.
	(3) But an establishment is not a care home if it is –
(a)	a hospital;
(b)	an independent clinic; or
(c)	a children’s home,
	or if it is of a description excepted by regulations.”

Submissions for Fenwood
The first issue
26.	Mr Hitchmough, counsel for Fenwood, submitted that the customer’s intention was the sole criterion by which to judge the availability of zero-rating.  He maintained that that was made plain by note (4) and confirmed both by section 62 of and paragraph 1 of Schedule 10 to the 1994 Act.  He observed that section 62 allowed the Commissioners to assess the customer to a penalty equal to the VAT which would have been chargeable if he issued a certificate which was incorrect; and paragraph 1 of Schedule 10 recognised that the actual use of a building might differ from its intended use.  (Under that paragraph, if within a period of 10 years from its completion, a building is used other than for a relevant residential or relevant charitable purpose, the customer is deemed to make a standard rated self-supply of the building).
27.	He contended that the Commissioners had taken into account only the actual use made of the Dene by GHG following its completion: they had not taken into account the intention of Pastoral, either at the time it issued the certificate or subsequently.  In Mr Hitchmough’s submission, Parliament had recognised that it did not always follow that where a person paid for the construction of a building, intended use would equate with actual use.  In the instant case, the shares in Pastoral had been  sold to GHG before the Dene was first brought into use.  Fenwood did not know whether GHG was using the Dene for a relevant residential purpose in accordance with Pastoral’s original intention, as evidenced by the certificate, nor was that relevant.  If it was not so using it, the Commissioners had the power to make good any potential loss of tax under paragraph 1 of Schedule 10 to the 1994 Act: GHG could challenge any assessment the Commissioners might choose to raise.  
28.	Mr Hitchmough submitted that in focusing on the actual, as opposed to the intended, use of the Dene (whatever that intended use might have been), the Commissioners had failed to apply the clear terms of the VAT legislation in deciding to make the assessment.
The second issue
29.	If I were to be with him in accepting that only the intended use of the Dene was relevant; and the Commissioners had confined themselves to its actual use, Mr Hitchmough submitted that it must follow that the assessment had not been made to best judgment.  He maintained that it was settled law that an assessment would not have been made to best  judgment if no basis could be advanced to support it. (see e.g. Rahman v. CCE (no 2) [2003] STC 150 per Chadwick LJ at paragraph 43).  In the instant appeal, Mr Hitchmough submitted that no support could be advanced, for the assessment was based solely upon the actual use of the Dene by GHG: on a plain reading of the legislation, it was irrelevant to the question whether the supplies made by Fenwood to Pastoral were standard-rated or zero-rated.  Further, he maintained, the Commissioners now appeared to acknowledge the relevance of intended use for in correspondence they had asked for such information.  That Mr Hitchmough contended might be likened to “shutting the stable door after the horse had bolted”: the assessment had already been made and must be judged against the evidence available to, and considered by, the Commissioners at the time.
The third issue
30.	As previously mentioned, it was common ground that use of the Dene would have fallen within use for a relevant residential purpose within note (4) to Group 5 of Schedule 8 to the 1994 Act had it not been for the exception for hospitals, prisons and similar institutions: the issue between the parties was the scope of the exception.  There was no statutory definition of what was a “hospital, prison or similar institution” in the VAT legislation.  Accordingly, the issue was whether those words, as a matter of ordinary usage of the English language, applied to the facts.  However, in contending for that ordinary usage, Mr Hitchmough maintained that  attention must also be paid to the specific examples of use for a relevant residential purpose set out in note (4).  Hospices which were exempted by note (4)(c) shared numerous features with hospitals.  He submitted that the exception must not be construed in such a manner as to render any of the specific examples of use for a relevant residential purpose ineffective. 
31.	For that  reason, he contended, it was virtually impossible to lay down any sort of exhaustive definition of hospital or similar institution.  The tribunal in the appeal of General Healthcare Group Limited v CCE (2001) Decision No. 17129 (“Grafton Manor”) took the “badges” approach found in some direct tax cases.  The tribunal also recognised that definitions in other statutes were unlikely to be of assistance.  Mr Hitchmough endorsed that approach, both in relation to a “hospital or similar institution” and to a “prison or similar institution”.  He did, however, observe that that was not the approach the Commissioners had adopted.  In reaching their decision that the Dene was being used other than for a “relevant residential purpose”, he claimed that they  had relied upon the following factors read with the Registered Homes Act 1984 and the Care Standards act 2000 (replacing it):
(1)	that treatment was provided to residents of the Dene;
(2)	that residents were detained under the Mental Health Act 1983;
(3)	that the Dene was a “hospital” as defined in the National Health Service Act 1977;
(4)	that in their view the Dene had been  expressly established and registered to provide treatment to patients suffering from mental illness; and
(5)	that detention at the Dene, under the Mental Health Act 1983, could be involuntary.

32.	Mr Hitchmough then turned to consider each factor in turn.  He observed that “treatment” was a badge identified by the tribunal in Grafton Manor, and claimed that, even if treatment in any relevant sense was being provided, without more that did not lead to the conclusion that an institution was a hospital or something similar.  
33.	Mr Hitchmough accepted that residents of the Dene were detained under the 1983 Act – a factor that apparently had influenced the tribunal in Wallis Limited v CCE (2002) Decision No. 18012.  (That case was concerned with a low security unit for mentally ill persons).  He noted that the tribunal’s decision in that case appeared to be that if a person were detained under a “hospital order” made under the terms of the 1983 Act, they must be detained in a hospital.  However, he submitted, that did not follow.  First, a hospital order referred only to an order for the detention for treatment of “an offender” made under section 37 of the 1983 Act.  Many residents of the Dene would have had no contact with the criminal justice system, their referral to the Dene having been made under section 3 of the 1983 Act.  Second,  references in the 1983 Act to “hospitals” were to be construed as including references to “mental nursing homes” within section 22 of the 1984 Act (sections 34(2) and 55(5)) of the 1983 Act).  The 1983 Act did not say that, for the purposes of that Act, “mental nursing homes” were hospitals.  The Dene was a mental nursing home registered under section 22 of the 1984 Act.  Third, although a person detained under the 1983 Act was detained for “medical treatment” that was defined by section 145(1) of the 1983 Act as including “care, habilitation and rehabilitation under medical supervision”.    
34.	Note (4)(b) expressly referred to the provision of care to persons in need of care by reason of a past or present mental disorder.  In the light of the foregoing Mr Hitchmough posed the question: what was the relevance of the Dene’s residents  having been “sectioned” under the 1983 Act?  He maintained that it had no relevance: the 1983 Act applied, inter alia, to persons referred to a mental nursing home for care and rehabilitation which was necessary by reason of a mental disorder.  All intended residents of the Dene fell within that description.  That, he contended, was precisely the sort of “relevant residential purpose” contemplated by note (4)(b).
35.	Mr Hitchmough submitted that the definition of “hospital” contained in the 1977 Act was of no assistance in construing the exception to note (4) to Group 5.  The 1977 Act defined a “hospital” as “any institution for the reception and treatment of persons suffering from illness…and includes clinics…maintained in connection with any such institution”.  He observed that a materially identical definition to that contained in the 1977 Act had been included in the National Health Service Act 1946 which was considered by the Court of Appeal in Minister of Health v. General Committee of the Royal Midland Counties Home for Incurables at Leamington Spa [1954] 1 Ch 530, a case concerning a hospice.  The majority of the Court of Appeal held that the home for incurables fell within the definition of “hospital” in the 1977 Act definition.  Mr Hitchmough submitted that it followed that by relying on the 1977 Act,  the Commissioners had inadvertently brought within the scope of the exception to note (4) one of the specific examples of use for a relevant residential purpose, a result that the tribunal in Grafton Manor, by adopting its “badges” approach, had been at pains to and had avoided. 
36.	He further submitted that the Commissioners’ view that the Dene had been  established and registered to provide treatment (in the conventional sense) to patients suffering from mental illness was wrong.  Pastoral’s aim was to provide long term care in a safe home-like environment to residents with mental illnesses and personality disorders of such a nature that treatment through medical intervention was pointless.  As Mr Marsh claimed in evidence, Pastoral was aiming to supply care rather than specific treatments: its model of care was not treatment based. For that reason Pastoral did not intend to accept women in an acute phase of mental illness; and if an acute illness developed a resident would be transferred to hospital for treatment. 
37.	Mr Hitchmough endorsed the approach of the tribunal in Grafton Manor based on identifying the characteristic badges of a hospital and a prison; and submitted that I should adopt it.   His submissions took the following form:
38.	The Badges – “hospital or similar institution”
(a)	“Treatment” – some sort of treatment alone did not, convert an institution into one similar to a hospital.  As the tribunal pointed out in Grafton Manor (at paragraph 22),  “Were it otherwise…if and when a cure for cancer is discovered, any hospice that started trying to cure some of its inmates instead of merely easing their passing would…lose zero rated building status.  That cannot be right.”
The Grafton Manor tribunal concluded that treatment as such was not provided, as any drugs provided were ancillary to the main purpose of the admission, which was care and rehabilitation.  The same could be said of Pastoral’s intention in relation to the Dene .
(b)	“Diagnosis” – would take place before admission to the Dene, as Pastoral did not provide any diagnostic services.  Although regular and on-going assessment took place, as the tribunal recognised in Grafton Manor (at paragraph 23), “assessment is not the same as diagnosis”.
(c)	“In-patient facilities” – were clearly available.  As at Grafton Manor (see paragraph 24 of the decision), residents were in-patients.
(d)	“Medical Staff” – it had clearly always been Pastoral’s intention to provide a high proportion of medically qualified staff at the Dene. However that of itself was not conclusive:  “One has to ask whether the qualified staff are acting in a hospital-like way – which rather begs the question” (Grafton Manor at paragraph 25).
(e)	“Length of Stay” – Pastoral intended that residents would treat the Dene as their home, possibly for life.  Further, residents would only be admitted under those sections of the 1983 Act applicable to long term care.  Research carried out for Pastoral by the Liverpool Hope University suggested that the average length of stay in similar institutions was 11 years.  That contrasted with the typical hospital where the length of stay was usually short, as the Commissioners had recognised in their Manual concerning zero-rating (in Chapter 8A at section 2.5) where they had stated:
“This note explains in detail the categories of residential building which qualify for relief.  The purpose of this note is to distinguish and relieve buildings which are places of abode and to tax short term stay buildings like hospitals, prisons, hotels, inns, conference and training centres”.
(f)	Finally in Grafton Manor, the tribunal observed (at paragraph 28), by way of general comment in support of its conclusion that the Manor was not a hospital or similar institution, that “the primary reason for the setting up of Grafton Manor was to deal with brain-injured people for whom hospitals properly so-called, with their robust, inflexible and institutional routines, had proved inappropriate. Hospitals do not, except to a very limited extent, expect or allow patients to furnish the decorations of their rooms. One would not expect to find hospital patients going out to the theatre or pub, with their carers, nor being encouraged to do their own shopping (and cooking).”
The same general observations were true of Pastoral’s intention for the Dene. 
(g)	Despite “aim to cure” not being a “badge” recognised specifically by the Tribunal in Grafton Manor, the class of relevant characteristics was not closed.  The typical hospital, whether general or psychiatric, aimed to cure its patients.  Pastoral, on the other hand, recognised that its residents could not be cured in any real sense.  The therapy provided was palliative in nature – its aim was to mitigate the effects of a resident’s mental illness or personality disorder and educate her “to enable her to function better”.  The distinction between curative and palliative care might, perhaps, explain the inclusion of “hospice” within note (4)(c).
39.	The Badges – “prison or similar institution”.  Accepting that there had been no previous appeal as to this aspect of the exception to note (4) proper construction of the expression presented the same difficulties as those that arose in relation to a “hospital [etc]”.  For that reason, the same badge based approach should be adopted, to identify the characteristics of a “prison [etc]”.
  (a)	“Penal function” – criminals were confined to  prison to punish them for criminal conduct, i.e. to “pay their debt to society”.  Pastoral’s  aim was care and rehabilitation. As it explained in the Summary to its Strategy/Philosophy Statement, “Services provided are safe and empowering rather than being based on punitive techniques”.  The objective of those parts of 1983 Act under which residents were referred to the Dene was help rather than punishment.
(b)	“Inmates are involved in the criminal justice process” – that was invariably true of all prisons.  Inmates would either be detained on remand, or as part of a custodial sentence.  By contrast, the majority of the residents of the Dene had had no involvement with the criminal justice process, their admission to the Dene having been under section 3 of the 1983 Act.  
(c)	“Detention against will” – all  prison inmates were detained against their will.  Although 1983 Act made provision for detention, it was not the original intention of Pastoral that all residents would be detained under its provisions of the 1983 Act.  Further, even where a resident was admitted under the 1983 Act if, as was typically the case at the Dene, admission was under section 3 thereof the resident’s nearest relative there was required to approve her admission (section 11(4)), and, save in extreme situations, the nearest relative had the right to discharge the resident (section 23).  A near relative could not prevent a person having to serve a custodial sentence. 
(d)	“Guards” – the majority of the staff employed at the Dene were medically qualified carers, rather than prison officers trained to guard the inmates.
(e)	“Security” – security within the Dene was minimal.  Although the perimeter of the site was surrounded by a high fence, within the philosophy was one of “openness”.  The Dene was specifically designed to operate as a “home” or “family unit”.  Breaches of rules did not result in penalties.  Tight security would have completely defeated Pastoral’s intention to provide a comfortable and relaxed home-like environment 
(f)	“Restriction of individual freedoms” – in line with a prison’s penal function, personal freedoms were severely restricted.  The same was not true of the Dene, where residents were “at home” and free to choose what to do.
40.	Applying the “characteristic badges” approach to the exception to note (4) as adopted in Grafton Manor, to the facts of the instant appeal, Mr Hitchmough submitted that the intended use of the Dene was neither as a hospital or similar institution, nor as a prison or similar institution.  Accordingly, the intention was to use the Dene for a “relevant residential purpose” with the result that its construction was eligible for zero-rating
Submissions for the Commissioners
41.	Mr Poole, counsel for the Commissioners, accepted that a mental nursing home, as defined in section 22 of the 1984 Act, could not be a hospital, as defined in section 128 of the 1977 Act.  But, he submitted, it could be, and indeed was, an institution similar to a hospital, so that its use fell within the exception to note (4).
42.	By note (4)(b), use for a relevant residential purpose meant use as, inter alia, “a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of … past or present mental disorder.”  By section 1 of the 1984 Act an institution was required to be registered as a residential care home if it provided, or was intended to provide, “whether for reward or not, residential accommodation with both board and personal care for persons in need of personal care by reason of … past or present mental disorder.”  Mr Poole observed that registration as a residential care home was not required for any establishment used, or intended to be used, solely as a mental nursing home (see section 1(5) of the 1984 Act).  The 1984 Act drew a distinction between residential care homes where personal care was provided for persons in need of personal care by reason of mental disorder, and mental nursing homes where nursing or other medical treatment was provided, including care under medical supervision, for patients with mental disorders: the distinction Mr Poole submitted, was between personal care and medical and nursing care.  A similar distinction was made at note (4) between a home providing residential accommodation with personal care to persons requiring personal care by reason of mental disorder, and a hospital or similar institution.  He submitted that the latter would provide nursing and medical treatment, including care under medical supervision.  The Dene, being registered as a mental nursing home rather than as a residential care home, in Mr Poole’s further submission, fell within the category of “hospital or similar institution”.
43.	Mr Poole next submitted that the Dene had always been intended to be an institution in which treatment was to be given to mentally disordered patients.  For his submission, he relied on the following factors:
(a)	The stated philosophy of Pastoral was that “people who suffer from mental disorder and require treatment within a secure setting have the right for their needs to be met in an appropriate environment.  We believe that every patient should be allowed to take an active role in all decisions relating to their care and treatment …”
(b)	The Dene was intended to, and did, accommodate patients detained under the 1983 Act.  By section 3, a patient might be admitted to a hospital and detained there for treatment on an application on the grounds that he was suffering from mental illness etc and “his mental disorder is of a nature or degree which makes it appropriate for him to receive medical treatment in a hospital”.  Mr Poole submitted that it was plain that a patient detained under section 3 must suffer from a mental disorder for which medical treatment was appropriate.  A person convicted of a criminal offence punishable with imprisonment might be made the subject of a hospital order and detained in a hospital (section 37 of the 1983 Act) provided, inter alia, he suffered from a mental disorder of a nature or degree which made it appropriate for him to be detained in a hospital for medical treatment.
(c)	Under sections 34(2) and 55(5) of the 1983 Act, the Act applied “in relation to a mental nursing home, being a home in respect of which the particulars of registration are for the time being entered in the separate part of the register for the purpose of section 23(5)(b) of [the 1984 Act], as it applies in relation to a hospital and references [in the Act] to a hospital … shall be construed accordingly.  
(d)	Without the provision of nursing care and medical treatment, the reason for building the Dene would not have existed.  
(e)	The institution provided, and was always intended to provide treatment and nursing care only for those suffering from mental disorder.  By its nature, such treatment and care could be long term.  Further, one would not expect a wide variety of treatments since only mental health problems were being addressed: diagnostic facilities might not necessarily be required.  Consequently, Mr Poole submitted one should not expect to find at an establishment like the Dene the same “badges” as one would find at a hospital or similar institution treating physical ailments.  The Dene was not a care home providing just personal care; it was providing medical supervision and treatment, and nursing services to its patients.  It was a hospital, or similar institution.
44.	Under section 2 of the 2000 Act (which, as previously mentioned, replaced the 1984 Act), a hospital which was not a health service hospital was an independent hospital, and “hospital” included an establishment in which treatment or nursing (or both) was provided for persons liable to be detained under the 1983 Act.  By section 3 of the 2000 Act, an establishment was not a care home if it was a hospital.  Hence the Dene would have had to register as a hospital.  Mr Poole maintained that that served to emphasise the difference between an establishment described in note (4)(b), and a hospital or similar institution: in the absence of any material change in the operation of the Dene, it also served to demonstrate that it was a hospital or similar institution, and it had always been intended to be so.
45.	Alternatively, Mr Poole submitted that the Dene was, and always had been intended to be, an institution similar to a prison : it was intended to accommodate patients detained under the 1983 Act; some of those patients might have been detained under that Act having committed a criminal offence for which they had been convicted; all detained patients had lost their liberty; whilst leave of absence might be granted to non-offender patients under section 17 of the 1983 Act, by section 18 a patient who was absent without leave could be taken into custody and sectioned to the Dene.  Mr Poole submitted that although the Dene was not a penal institution, there were sufficient similarities between the Dene and a prison for it properly to be regarded as an institution similar to a prison.
Conclusion
46.	Dealing first with the third issue before us, we propose quickly to dispose of the question whether the Dene is a “prison or similar institution”.  Prisons are intended to accommodate only those convicted of criminal offences, or those remanded in custody pending trial for such offences.  In those circumstances, we are not prepared to extend the meaning of “prisons or similar institutions” in the exception to note (4) to buildings intended to house anyone other than convicted criminals, or persons charged with criminal offences who have been remanded in custody.  It follows that we hold that the Dene is not a “prison or similar institution”.  (We might add that, had it been necessary, we should have adopted the argument of Mr Hitchmough on the point in its entirety, and rejected that of Mr Poole).
47.	Turning next to the question whether the Dene is a “hospital or similar institution”, we should say that, whilst we have considered the parties submissions in detail and would express our gratitude to them for their assistance, in reaching our conclusion we propose to adopt a course which Mr Hitchmough suggested in passing as possibly being of help to us.
48.	In his dissenting judgment in the Royal Midland Counties Home for the Incurables case, which required the Court of Appeal to decide whether the home was a hospital and so liable to transfer to the local health authority, Denning LJ (as he then was) held that “a hospital” as defined [in section 79 of the National Health Service Act 1946] was an institution whose main purpose was to treat patients for their illnesses by the exercise of professional skill. If the main purpose of the institution was only to take care of the patients and to make life more comfortable for them, it was not a “hospital” but a “home”.  (We mentioned earlier that the definition of a ‘hospital’ in the legislation relating to the National Health Service prior to the 1977 Act was materially identical to that in the 1977 Act).
49.	In a passage in his judgment we propose to follow as being exactly on the point with which we are dealing, Denning LJ said at pp 547 and 548:
	“The key to the legal position lies in the fact that the [National Health Service Act 1946] draws a sharp distinction between ‘treatment’ and ‘care’.  (See sections 24 and 28 of the Act).  If an institution is provided for the reception and ‘treatment’ of incurables, it is a hospital and is to be taken over by the State: but if it is provided only for their reception and ‘care’ of them, it is not.  Where is the line then to be drawn in this regard between ‘treatment’ and ‘care’?  Neither is defined in the Act, but ‘treatment’ means I think the exercise of professional skill to remedy the disease or disability, or to lessen its ill effects or the pain and suffering which it occasions; whereas ‘care’ is the homely art of making people comfortable and providing for their well-being so far as their condition allows.  ‘Nursing’ too, is not defined; but it covers, I think, both treatment and care.  Some part of it, indeed an important part, is the exercise of professional skill: but a goodly part, perhaps the larger part, is just kindness and attention.  When the Act, therefore, defines ‘illness’ as including any disease or disability requiring mental or dental treatment, or nursing, it means, I think, a disability which requires the exercise of professional skill, as distinct from a disability which only requires care and attention.
	Likewise, when the Act defines ‘hospital’ as an institution provided for the reception and treatment of persons suffering from illness, it means an institution provided for the exercise of professional skill upon them, as distinct from an institution provided for the care of them.  There are, of course, many institutions which have both objects.  Their purpose is to treat persons suffering from illness by the exercise of professional skill and to look after them as well.  The position of these institutions depends, I think, on their main purpose.  If the main purpose is to treat patients for their illness by the exercise of professional skill, then the institution is a hospital.  But if the main purpose is only to take care of them and make life more comfortable for them, then it is not a hospital but a home, and is not caught by the Acts.  A subsidiary purpose may be to treat them by the exercise of professional skill, but this will not make it a hospital if the main purpose is that it should be a home for them.  In an old people’s home, there are often nurses with professional qualifications, but that does not make it a hospital.  Some reliance was placed on the provisions for persons suffering from mental defectiveness and for persons during convalescence, but the governing word again is ‘treatment’.  If the main purpose of the institution is to treat the mental defectives or the convalescents by the exercise of professional skill then it is not a hospital; but if the main purpose is to take care of them it is not.  
	Turning now to the Royal Midland Counties Home for Incurables, the rules say that ‘No case shall be admitted unless “it requires medical supervision and nursing.”’.  This rule was said of itself to make the home a ‘hospital’ within the meaning of the Act.  I do not think so.  The rule would be satisfied by only a little professional skill being required for any particular person, whilst the main requirement was to look after him and give him a  home.”
50.	It will be recalled that we earlier found that Pastoral took only patients for whom ordinary psychiatric hospitals could do no more, intending to provide them with a home, if necessary for life; its philosophy was care based; it aimed  to supply care rather than specific treatments ; and it did not accept patients in an acute phase of illness, and transferred to a hospital any patient whose condition necessitated acute intervention.  Those for whom it catered could not be treated in the conventional sense.
51.	Viewed against that factual background, we conclude that the main purpose of the Dene, as operated by Pastoral, was to take care of its residents and make life more comfortable for them, rather than to treat them for their various conditions by the exercise of professional skill.  It follows that we hold that the Dene was not intended to operate as a “hospital or similar institution”.  We also hold that it was a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of past or present mental disorder within note (4)(b).
52.	Had we followed the “badges” approach suggested by Mr Hitchmough, we  should have arrived at the same result by a slightly different route.  With but minor reservations to the points which he made, we endorse his general approach.  In doing so, we must reject the case advanced by Mr Poole, but record that we  have considered it in detail.
53.	Thus far we have dealt only with the third issue before us.  We now turn to the first issue.  It is plain from Miss O’Sullivan’s letter of 7 August 2001 that the Commissioners did apply the wrong test in deciding that Fenwood’s supplies to Pastoral were standard-rated.  And whilst we accept Mr Poole’s point that in making their decision the Commissioners were entitled to consider the actual use of the Dene shortly after it opened, that does not excuse their failure to apply the correct test.  We need merely say that the Commissioners erred in considering only the actual use of the Dene following  its completion.  In those circumstances, in our judgment the assessment under appeal must have been made arbitrarily, and therefore not to best judgment.

54.	We allow the appeal, and direct the Commissioners to pay Fenwood’s costs.

David Demack
Chairman
Released date: 8 March 2005