19041
	 VAT — EXEMPT SUPPLIES — health and welfare — welfare services for care or protection of children — whether supplies of the services of carers to private welfare institutions exempt — whether article 13A(1)(g) of EC Sixth Directive so implemented in VAT Act 1994 as to exempt supplies made by agency having regard to meaning of “state-regulated” in item 9(b) of group 7 of Sch 9 of VATA — yes — appeal allowed

MANCHESTER TRIBUNAL CENTRE

 
 	
	K & L CHILDCARE SERVICES LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Michael Johnson (Chairman)
						Robert Grice	

Sitting in public in Birmingham on 17 and 18 March 2005

Anthony Trotman, of Trotman Associates Limited, VAT consultants, for the Appellant 

James Puzey, counsel, instructed by the Solicitor’s office of HM Customs and Excise for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

Background

1.	This appeal concerns the application of group 7 of Schedule 9 of the Value Added Tax Act 1994 (“the 1994 Act”).  The tribunal is concerned with the scope of item 9 of group 7 and note (6) thereto as substituted, and note (8) to that group as added, by the Value Added Tax (Health and Welfare) Order 2002 SI 2002/762, with effect from 21 March 2002.  

2.	Those adjustments to the 1994 Act were made so as to reverse the effect of the decision of the High Court in the case of Customs and Excise Commissioners v Kingscrest Associates Ltd (trading as Kingscrest Residential Care Homes) [2002] STC 490, in which Pumfrey J held that care homes were not centres for medical treatment within the meaning of item 4 of group 7 of Schedule 9 of the 1994 Act.  As sometimes happens, however, the adjustments appear to have gone beyond what may have been required to meet the particular circumstances in mind when they were formulated.   

3.	As further amended by the VAT (Health and Welfare) Order 2003 SI 2003/24 with effect from 31 January 2003, item 9(b) of group 7 has now been extended to exempt –

“the supply by  a state-regulated private welfare institution or agency of welfare services  ” [the italicised words constituting the further amendment].    

4.	In a ruling contained in a letter dated 26 January 2004 written by Mr Mark Gammon of the National Advice Service of H M Customs and Excise to Mrs Lesley Stanley of the Appellant, the Commissioners of Customs and Excise (“Customs”) ruled that supplies made by the Appellant were subject to VAT at the standard rate.

5.	The Appellant has appealed to the tribunal against this ruling, contending that its supplies should be treated as exempt from VAT.

Evidence

6.	Mrs Stanley, who is one of the directors of the Appellant, has given oral evidence to the tribunal in which she has explained the nature of the supplies made by the Appellant.  She was the only witness from whom we heard oral evidence.  Whilst there is no real dispute between the parties as to any of the facts underlying this appeal, it is important, having regard to the way our decision has gone, that we should set out the precise findings on which our decision is based.  

7.	Our findings are derived from the evidence of Mrs Stanley and the documents and information made available to us by the parties.  In particular, Mr Gammon of Customs has provided the tribunal with a witness statement and exhibits dated 15 September 2004, slightly corrected by agreement between the parties, whose contents we have read and considered.   Mr Gammon was not required to give oral evidence. 

Facts

8.	The following are our findings of fact.

9.	The Appellant employs qualified nursery nurses, nursery assistants and carers.  The Appellant’s business consists of supplying the services of these individuals, whom we will call “carers” for short, to private day nurseries, pre-schools and local education authority schools, which institutions we will call “kindergartens” for short (although not all the children looked after by the carers are very young).  

10.	It is common ground that these kindergartens are engaged in “the care or protection of children” as described in note (6) to group 7 of Schedule 9 of the 1994 Act.

11.	The services of the carers supplied by the Appellant are sometimes provided by the day, sometimes for periods of days, and sometimes for longer periods.  The carers fulfil the functions of members of staff of the kindergartens with which they are placed.  They do everything that any other member of staff would do; they have the same level of responsibility vis-à-vis the kindergarten, its children and parents as any other carer working in the kindergarten; they stand and fall together with all the other staff when it comes to “OFSTED” inspections pursuant to the regulations made under Part XA of the Children Act 1989, as inserted by the Care Standards Act 2000.

12.	The carers are subject to the Day Care and Child Minding (National Standards) (England) Regulations 2003 SI 2003/1996, when placed with institutions subject to those regulations, specifically regulation 6, which provides for notification to Her Majesty’s Chief Inspector of Schools of information as to the occurrence of any of the events set out in Schedule 2 to those regulations, in particular changes in the personnel looking after children at institutions covered by those regulations. Further, under the Day Care and Child Minding (Function of Local Authorities: Information, Advice and Training) (England) Regulations 2001 SI 2001/2746, each local authority is responsible for securing the provision of training for the carers, designed so as to take account of the requirements of the national standards and contents of the supporting criteria (regulation 4).

13.	The Appellant’s carers are not medically registered (save in one instance, where a carer was qualified as SRN); on the whole they are qualified nursery nurses.  The Appellant is not itself regulated for the purposes of its business – indeed there is nothing to indicate that, in the immediate future, it might become so regulated, or apply to become so regulated; however the Appellant could not carry on business as it does if its carers did not satisfy the requirements of the law for their employment.  

Observations about the law  

14.	The sanctions available in law in respect of carers who fail to attain the expected standards are not directly exercisable as against the Appellant, nor against the carers specifically, but rather against institutions to which their services are provided.  It is, however, clear that the law controls the entitlement of the carers to provide care by making it impossible for them to find employment in their habitual workplace, ie in day care institutions caring for young children, unless a particular criterion of “suitability” is met by carers from time to time. 

15.	The intention of Parliament in this regard as regards the protection of young children can be seen from section 79B(4) of the Children Act 1989.  Under that sub-section, persons are qualified for registration for providing day care for such children if inter alia every person (this would include the carers whose services are provided by the Appellant) looking after children on the premises is suitable to look after children under the age of eight.  

16.	This obligation will be modified, to become (as we understand) less onerous, when the amendments provided by Schedule 4 of the Children Act 2004 come into force.  Section 79B(4) will then read as follows, so far as material –

“A person is qualified for registration for providing day care on particular premises if –

(a)  he has made adequate arrangements to ensure that –

(i)  every person (other than himself and the responsible individual) looking after children on the premises is suitable to look after children under the age of eight  ”.

17.	Accordingly the registered person takes responsibility for the suitability of his personnel looking after children on the premises, including carers provided by the Appellant.  Indeed, such personnel are described as “associates” in the Child Minding and Day Care (Applications for Registration) (England) Regulations 2001 SI 2001/1829, as amended by the Child Minding and Day Care (Applications for Registration) (England) (Amendment) Regulations 2003 SI 2003/1995.  Those amending regulations show how the dates of birth, full names and any former names or aliases of any associates of the applicant for registration are regarded as just as important, in the arena of day care for young children, as those of the applicant for registration, for the purposes of the substituted paragraph 1 of the Schedule to the principal regulations SI 2001/1829 (paragraph 5 of the amending regulations).

Conclusions drawn from the above

18.	We therefore find that the supplies of the carers’ services are integral to the kindergartens with which they are placed, in particular where the placements are affected by Part XA of the Children Act 1989 and regulations made thereunder.  We are also satisfied:

•	that the Appellant, through providing the services of the carers, is directly connected with the care or protection of children and young persons;

•	that the Appellant, in view of the control exercised by the state over the carers, is closely linked, as regards the services it supplies, with the supplies made by the kindergartens themselves.    

Relevant European background

19.	The interpretation of the welfare services provisions of group 7 of the 1994 Act must reflect Article 13A(1)(g) of the EC Sixth Council Directive (“the Directive”).   Mr Puzey, appearing for Customs, has cited to us the Kingscrest case mentioned above.  We have not derived much assistance from that case, dealing as it does with the exemption or lack of exemption of residential care homes.  We can well understand the doubt revolving round the correct treatment of such institutions for the purpose of group 7, having regard to Article 13A(1)(b) and (g) of the Directive.   

20.	We do not feel the same difficulty in the present case.  The case that has assisted us, and which we were at pains to draw as soon as we reasonably could to the attention of Mr Puzey and to Mr Trotman, representing the Appellant, is that of Gregg v Commissioners of Customs and Excise [1999] STC 934, a decision of the European Court of Justice, in which the scope of Article 13A(1)(b) and (g) was considered.

Submissions of the representatives of the parties

21.	As we regarded it as important that we should receive submissions as to the effect of the Gregg case on the VAT treatment of the supplies made by the Appellant, having regard to the provisions of the 1994 Act we are considering, we adjourned overnight for such submissions to be prepared and made, as they duly were.  We record our gratitude to Mr Puzey and Mr Trotman for the conscientious way in which this was done.

22.	In making his submissions for Customs, Mr Puzey accepted that the Appellant is properly regarded as a private welfare agency, but he submitted that the Appellant is not “state-regulated”, and for that reason does not fall within item 9(b).  He referred us to the definition of the expression “state-regulated” in note (8) to group 7.  

23.	Mr Puzey contended that all that the Appellant is doing is supplying staff.  He submitted, as we accept, that the exemptions provided in Article 13 of the Directive are to be interpreted strictly, since they constitute exceptions to the general principle that value added tax is to be levied on all services provided for consideration by a taxable person:  see Swedish State v Stockholm Lindőpark AB [2001] STC 103 at [25] (page 126 b-c).  

24.	Both Mr Trotman and Mr Puzey addressed us on the extra-statutory concession provided by Customs, referred to in their Business Brief 01/03, whereby welfare services agencies may be treated as exempt if they can show that they are in the process of being registered, or will be registered in due course.  As to this, we have found as a fact that there is no registration process applicable to the Appellant, or which may apparently become applicable to the Appellant in the immediate future.

25.	Mr Trotman relied in his submissions upon the degree of government control that exists in the arena of day care for young children.  This is extensive.  We have referred to some of the relevant regulations in the above paragraphs.  Mr Trotman submits that the regulations are so broad in their operation that they amount to regulation of the Appellant.

26.	Having had his attention drawn to the Gregg case, Mr Trotman submitted that the legal identity of the Appellant, as a limited company, was irrelevant to whether the services of the carers supplied by the Appellant should be entitled to exemption.  Mr Trotman pointed out that the treatment of agencies like that of the Appellant is different for exemption purposes in Scotland.  He also pointed out that there is not a “level playing field” in England between those agencies providing the services of carers which are undoubtedly exempt – such as local authorities – and those agencies, such as the Appellant, which are being rejected for exemption.

Our decision with reasons

27.	In considering our decision, we have first had regard to the Gregg case.  In that case, the ECJ determined, at [15] and [17] (pages 949 j and 950 b-c of [1999] STC), that it cannot be inferred, from the fact that Article 13A(1) of the Directive mentions different categories of economic operators, that the exemptions provided for in that article are confined to legal persons, where the article refers expressly to activities undertaken by “establishments” or “organisations” respectively, whilst in other cases an exemption may also be claimed by natural persons.  The court held that the terms “establishment” and “organisation” are in principle sufficiently broad to include natural persons as well.

28.	Moreover, the court held, at [17], that it may be inferred from the fact that the Community legislature did not use the term “legal person”, a clear and unambiguous term, but rather “establishment” and “organisation”, that it did not intend to confine the exemptions to the activities carried on by legal persons, but meant to extend the scope of those exemptions to activities carried on by individuals.

29.	In our opinion, that interpretation of the court lends the words “or agency” in item 9(b) of group 7 of Schedule 9 of the 1994 Act, as amended in 2003, a significance beyond what might be literally apparent.  It is trite law that we should apply a purposive construction to the legislation.  We must presume that the UK enactment is compatible with the Directive – a Community law provision – unless and until it has been found to be incompatible. 

30.	We are of the view, moreover, that we should adopt what is sometimes called a teleological approach in construing these provisions.  In other words, we should look to the application of the provisions according to the spirit rather than the letter, having regard to a developing sense of their meaning.  This is the method adopted by the ECJ itself.   

31.	In this regard, we note that the UK has chosen to give legal effect to Article 13A(1)(g) of the Directive by sub-dividing the bodies governed by public law, and other organisations recognized as charitable by the UK, into (a), (b) and (c) in item 9 of group 7.  In addition to supplies by charities, which are covered by (a) in item 9, we have (b), namely supplies by state-regulated private welfare institutions or agencies.  It follows that the supplies referred to in (b) are to be treated as exempt, as much as supplies by charities, even though strictly not made by charities.  The same point can be made in relation to (c), ie supplies by public bodies.  Again, the supplies referred to in (b) are to be treated as exempt, as much as supplies by public bodies, even though strictly not made by public bodies.

32.	It can be seen from the definition of “state-regulated” in note (8) to group 7 what underlies the thinking in including (b) as well as (a) and (c) in item 9.  The UK’s interpretation of Article 13A(1)(g) is that it should suffice for the purposes of exemption that a private welfare institution or agency should be approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to a provision of inter alia a public general Act of Parliament.  

33.	What is behind this definition?  It is, as we see it, the concept of control.  “Approved, licensed, registered or exempted from registration” is a long way of stating “controlled”.  But, as it seems to us, the use of several words where one might have done goes to explain the manner of the control envisaged – the control may be more or less direct, as Parliament may have decided.

34.	We have come to the conclusion that there exists such control over the Appellant as the definition of “state-regulated” requires.  If, as appears, charities and public bodies are expressly exempted under (a) and (c) respectively of item 9, what is the criterion for satisfying (b)?  It is, we believe, that Parliament shall have put in place a scheme of regulation, whereby, directly or indirectly, the welfare service supplies of the institution or agency are governed by the state.  

35.	We have found that the Appellant is integrally connected, via its carers, with institutions to which such a scheme of regulation applies.  We agree with Mr Puzey that exemptions are to be interpreted strictly.  However the scope of the exemptions must still be discerned having regard to the reality of the situation one is considering.  We think that the reality here is that the Appellant is operating arm-in-arm with kindergartens to provide welfare services of the kind to which note (6)(b) to group 7 refers.  

36.	So we have concluded that the Appellant is “state-regulated”.   We think that the addition of the words “or agency” to item 9(b) in 2003 covers the Appellant’s case, subject to this matter of regulation.  So long as the “agency” is distinct from the carers, which it is, it satisfies the definition of that term however it may be legally personified.  There is no requirement, as the ECJ has made clear, for a particular legal structure to exist in order for the supplies made to be entitled to exemption.  

37.	We are fortified in our conclusion by the requirement to secure fiscal neutrality, referred to by the ECJ in the Gregg case at [20] (page 950 e-f).  The anomalies mentioned by Mr Trotman in his submissions (see paragraph 26 above) are not only unfair, they offend against the principle mentioned.

38.	In the end result, the extra-statutory concession referred to by Mr Trotman and Mr Puzey in their submissions is irrelevant to the outcome of this appeal.  Had it been potentially relevant, it would not have assisted the Appellant, in view of our findings of fact.

Outcome of our decision 

39.	It is of course true, as the final words of note (6) to group 7 make clear, that it is only in respect of those welfare services where control exists, in the sense we refer to above, that the Appellant would fall within item 9(b).  However to the extent that kindergartens are regulated, and the Appellant supplies the kindergartens with the services of the carers, who are in turn controlled as we have described, the Appellant in our judgment satisfies the criteria for exemption that we are considering, as much as do the kindergartens themselves.

40.	To that necessarily limited extent, this appeal succeeds.   If, in the light of this decision, an issue arises as to which supplies of services precisely are exempt and which are not, we are prepared to make further findings and to give a further ruling.  To that end we give leave for the appeal to be restored to the list if required by either party for those purposes.

41.	With regard to costs, our provisional view, without at this stage having heard argument, is that costs should follow the event.  As it has been necessary for the Appellant to come to tribunal to establish the correctness of its contention that its supplies are exempt, it should receive its costs of so doing, to be summarily assessed by the tribunal in a reasonable amount and paid by Customs.  We give leave for the appeal to be restored to the list if required by either party for argument as to costs, if costs cannot be agreed.

42.	Subject as aforesaid we allow the appeal.

MICHAEL JOHNSON
CHAIRMAN
Release Date: 18 April 2005

MAN/04/0129