19300

VALUE ADDED TAX – Exemption for health and welfare supplies – Group 7, item 1(a) and Note (2), Schedule 9, VATA – Appellant arranges for a diagnostic test to be carried out by a laboratory for the patient who is the Appellant’s customer – the diagnostic test supplied by the laboratory to the Appellant as an exempt supply – the Appellant makes an onward supply to the patient at a marked up price – whether that supply is exempt on the basis that the laboratory’s supply is exempt – held the Appellant’s supply is a supply of a different nature from the laboratory’s supply and is not exempt because the services supplied by the Appellant are not wholly performed or directly supervised by a registered medical practitioner – Gregg and another v Commissioners of C&E considered – held the principle of tax neutrality does not compel a different conclusion – appeal dismissed 

LONDON TRIBUNAL CENTRE

	LIFESTYLES HEALTHCARE (EUROPE) LIMITED	Appellant

	- and -

	THE COMMISSIONERS 
                        FOR HER MAJESTY’S REVENUE AND CUSTOMS 	Respondents

			Tribunal:	JOHN WALTERS QC (Chairman)
					MRS R.S. JOHNSON

Sitting in public in London on 20 July 2005

Mr. Alan Pink of QED tax consulting appeared on behalf of the Appellant 

Mr. Paul Key, of Counsel, instructed by the Solicitor for HM Revenue & Customs, appeared on behalf of the Respondents

© CROWN COPYRIGHT 2005

DECISION

Introduction and facts

1.	Lifestyles Healthcare (Europe) Limited (“the Appellant”) appeals against the amount of an assessment raised on 27 May 2002 in the sum of £17,365 VAT for the periods 08/00 to 11/01 inclusive (ie. the period from 1 June 2000 to 30 November 2001).  £16,621 of the VAT assessed is in dispute, as it relates to output tax on supplies which the Appellant contends are exempt as health and welfare services within Group 7 of Schedule 9, VAT Act 1994 (“VATA”).
2.	The Tribunal heard evidence from Ms. Melanie Beard, who has worked as the Appellant’s business manager for just over five years.  From her evidence, and the documentary evidence before the Tribunal we find that the supplies concerned are made in the following circumstances.
3.	A business relationship exists between the Appellant and a medical clinic operated by Dr. Marilyn Glenville.  The Tribunal was told that the managing director of the Appellant is Dr. Glenville’s husband. Dr. Glenville gives nutritional advice relating to women’s health problems.  Patients from Dr. Glenville’s clinic (on Dr. Glanville’s recommendation), or other persons who have found out about the Appellant by reading one of several books written by Dr. Glenville, approach the Appellant and ask for diagnostic tests to be carried out.  These are either hair sample tests or stool tests.  They are in fact not carried out directly by the Appellant, but, as the patients know, they are carried out by one of a number of laboratories unconnected with the Appellant. No one tells patients that the Appellant is acting as agent for any of the laboratories.
4.	Approaches from patients almost always are by telephone to the Appellant.  There is no written agreement.  Payment (usually by credit card) is taken for the test at the time of the agreement reached over the telephone.  The Appellant charges a price to the patient which includes a profit mark-up over and above the charge which the laboratory makes to the Appellant.
5.	A kit is sent to the patient for the purpose of taking a sample and sending it to the laboratory.  In the case of a hair sample test, the kit is an envelope and form with the laboratory’s name on it.  The kits are dispatched to patients either by the Appellant or by the laboratory, presumably on the Appellant’s instruction.  The kits, with samples, are returned by patients direct to the laboratory concerned (apart from a period of about six months in 2000 when hair samples were sent by patients to the Appellant, who forwarded them on to the laboratory).  The test is carried out and the results are sent to the Appellant (not to the patient concerned).  The Appellant passes all results to Dr. Glenville.  She gives the results to patients in consultation, or sends them to patients with an interpretation.
6.	The laboratories charge the Appellant for conducting the tests and the Tribunal was shown sample invoices.
7.	Ms. Beard said that she understood that the tests, when carried out at the laboratories, were supervised by medical practitioners, but she could give no details.  There were no written agreements between the Appellant and any of the laboratories put in evidence. There was evidence that supplies of the tests by the laboratories were (or had been before a date in 2003) accepted by the Commissioners as being exempt for VAT purposes under Group 7, item 1, Schedule 9, VATA.  Such acceptance of the application of the VAT exemption in the case of supplies by the laboratories seemed to turn on whether a registered health professional employed by the laboratory actually supervised the testing services carried out.
The issue
8.	The issue for the Tribunal’s decision is whether the services supplied by the Appellant are exempt under Group 7, item 1, Schedule 9, VATA.
9.	The relevant provisions are as follows:
“Group 7 – Health and Welfare
Item No. 1 The supply of services by a person registered or enrolled in any of the following–
(a)	the register of medical practitioners or the register of medical practitioners with limited registration;
…
NOTE (2) Paragraphs (a) to (d) of item 1 … include supplies of services made by a person who is not registered or enrolled in any of the registers or rolls specified in those paragraphs where the services are wholly performed or directly supervised by a person who is so registered or enrolled.”
The submissions of the parties
10.	Mr. Pink’s case for the Appellant is that the Appellant is supplying to its customers (the patients) the very services which are supplied by the laboratories to the Appellant.  Those supplies are exempt and so, he argues, it follows that the Appellant’s supplies are exempt also.  Note (2), cited above, he submits, distinguishes between the supply of services and the performance of services and enables a supply to be exempted where the services have been performed by a different person.
11.	He cites Gregg and another v Commissioners of Customs and Excise [1999] STC 934, and, in particular, paragraphs 28 and 29 of the Advocate-General’s Opinion, in support of the proposition that the principle of tax neutrality which “constitutes the logical basis of VAT” (ibid.  at paragraph 29) obliges the Tribunal to interpret article 13A(1)(b) of the Sixth Directive, which is implemented in Group 7, Schedule 9, VATA, on the basis that qualification for VAT exemption on the basis of “the personality of the operator of the activity” (ibid. at paragraph 28) is to be avoided. 
12.	Article 13A(1)(b) is in the following terms:
“Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse:
(b) hospital and medical care and closely related activities undertaken by bodies governed by public law or, under social conditions comparable to those applicable to bodies governed by public law, by hospitals, centres for medical treatment or diagnosis and other duly recognised establishments of a similar nature.”
13.	His primary submission is that Note (2) to Group 7 should be interpreted in such a way as does not restrict the exemption to supplies defined by reference to the personality of the supplier.  If the Tribunal were to hold that Note (2) was more restrictive than he submits, he asks us to consider whether it is ultra vires the Directive. He further relied on the decision of the European Court of Justice in the joined cases of Finanzamt Gladbeck v Linneweber (Case C-453/02) and Finanzamt Herne-West v Akritidis (Case C-462/02) [2005] SWTI 255. 
14.	He submitted that the Tribunal should have regard to the reality of the situation.  He said that the evidence established that the patient is paying the Appellant for a diagnostic service which, it is safe to assume (from the fact that the laboratories’ supplies to the Appellant in the period relevant to the assessment were exempt), is carried out by or under the supervision of appropriately qualified personnel at the laboratory.
15.	For the Commissioners, Mr. Key submits that the supplies made by the Appellant are not supplies of medical care.  Further, they are not supplies wholly performed or directly supervised by a person on a relevant register.  Further, as a matter of fact, the Appellant has not established that the diagnostic tests are (at the laboratories concerned) wholly performed or directly supervised by a person who is registered or enrolled as required by item 1 of Group 7 as amplified by Note (2).
16.	In particular, Mr. Key does not accept that there are “back to back” unchanged supplies – that is to say that the supplies by the various laboratories and the supplies by the Appellant are supplies of the same services.  He submits that the Appellant is making a supply of a bundle of services, the arrangement for medical tests to be carried out, the procuring of their being carried out, and the delivery of the results of the tests when received from the laboratory to Dr. Glenville.
17.	He relied on Ambulanter Pflegedienst Kügler GmbH v Finanzamt für Körperschaften I in Berlin (Case C-141/00) [2002] ECR I – 6833, a case on the exemption in article 13A(1)(c) for “the provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned”, for the proposition that the medical exemptions provided for by article 13A envisage a requirement that an exempt service must be performed by medically qualified personnel.  
18.	He submitted that lack of identification between the medically qualified performer of an exempt medical service and the supplier of that service is only permitted in the case of a supply by a person who employs a medically qualified person to perform the service.  Thus, he said, there was a material difference between a corporate entity who supplies a medical service which is actually performed by its medically qualified servant, and two corporate entities, one of whom (A) outsources the supply to the other (B), and where the medically qualified servant of B actually performs the service.  In that case the supply by B would be exempt, but the supply by A would not be exempt.
19.	He cited EC Commission v UK [1988] ECR 817 to show that in the context of article 13A of the Sixth Directive, the European Court has drawn a distinction between supplies of goods and supplies of services, expressly listing the cases where supplies of goods are exempt, since they constitute derogations from the general principle of taxation of supplies of goods (ibid. at paragraph 35 of the judgment of the Court).  He showed that UK VAT law had been amended to remove exemption from supplies of goods in the health and welfare context following the decision in that case, which was adverse to the UK government.
20.	He also cited SUFA [1989] ECR 1737 and D’Ambrumenil v Customs and Excise Commissioners [2004] QB 1179 as authority for the familiar principle that the exemptions envisaged in article 13 of the Sixth Directive are to be interpreted strictly.
21.	He cited D v W [2000] ECR I 6795 as authority for the proposition that the exemption in article 13A for medical services is limited to services which themselves have therapeutic purposes and does not apply to other services performed by medical personnel (for example biological tests designed to establish the genetic affinity of individuals).
22.	He accepted that the tests in the instant case were therapeutic in nature but his case was that the exemption was limited to supplies of those tests by laboratories whose medically qualified personnel performed or directly supervised the performance of the tests.  It did not extend to the supplies made by the Appellant.
Decision
23.	First of all, the Tribunal holds that the Appellant throughout acts as principal and not as agent.  Mr. Pink made no submission that the Appellant was acting as agent, and no submission as to who the Appellant’s principal would be, if it were acting as agent.  No suggestion is made in the dealings which the Appellant has with patients (or with the laboratories) that it is acting as agent. Therefore in no sense does the Appellant directly provide diagnostic tests.
24.	Secondly, in the Tribunal’s judgment, on a straightforward reading of Note (2) to Group 8, Schedule 9, VATA, in conjunction with item 1 of that Group, it is clear that supplies of services which are exempt only by virtue of Note (2) are supplies of services which are themselves wholly performed or directly supervised by a registered medical practitioner.
25.	This requires that the supplier is in a position to, and does itself, supply services which are wholly performed or directly supervised by a registered medical practitioner.  Most obviously this will cover the case where the supplier is a corporate entity which employs a registered medical practitioner as its servant or agent, who performs or supervises the services supplied.
26.	It is a general rule of VAT that anything which is not a supply of goods but is done for a consideration is a supply of services (see: section 5(2)(b) VATA). This is an indication that in identifying what are the services supplied by a supply of services, one enquires as to what is done in exchange for the consideration.  The Court of Justice has held that there must be a direct link between the service provided and the consideration received – Apple and Pear Development Council v Customs and Excise Commissioners (Case 102/86) [1988] STC 221, judgment at paragraph 12. This focuses the attention on the contractual framework in which the services are supplied.  
27.	On the facts of this case, the services supplied by the Appellant to a patient are “what is done” for the consideration which the patient pays to the Appellant.  Such services must be what is done by the Appellant, because that is the subject matter for which the consideration is paid by the patient.  On a proper analysis the consideration paid by the patient to the Appellant is not paid for what is done by the laboratory under its separate contract with the Appellant (i.e. the diagnostic test).  There is not the necessary direct link between the service of performing the diagnostic test and the consideration paid by the patient to the Appellant.  Therefore the Tribunal rejects both Mr. Pink’s submission that the Appellant supplies a diagnostic test to the patient and his argument that a patient pays the Appellant for a diagnostic service.
28.	The patient pays the Appellant for what the Appellant does in return for the payment, which is to procure that the laboratory carries out a diagnostic test. That is the service supplied by the Appellant to the patient.  On this analysis Note (2) to Group 7 of Schedule 9, VATA does not enlarge the exemption provided by item 1 to include the services supplied by the Appellant.
29.	There remains to consider Mr. Pink’s point that we should construe Note (2) by reference to the principle of tax neutrality, with the result that the exemption is extended to include the services supplied by the Appellant.
30.	The principle of tax neutrality, as laid down by the Court of Justice in, for example, Fischer v Finanzamt Donaueschingen (Case C-283/95) [1998] STC 708, cited in the joined cases of Finanzamt Gladbeck v Linneweber (Case C-453/02) and Finanzamt Herne-West v Akritidis (Case C-462/02) [2005] SWTI 255, is a principle designed to prevent the distortion in competition which would result from supplies of similar goods and services, in competition one with another, being treated differently for VAT purposes. This point is also brought out in the judgment of the Court of Justice in Gregg and another v Commissioners of Customs and Excise, at paragraph 20.
31.	The decision in Gregg was that the principle would be frustrated if the possibility of relying on an exemption was dependent on the legal form in which the taxable person carried on his activity.
32.	In this case, however, the services supplied by the Appellant are not in competition with those supplied by, for example, the laboratories, whose supplies are admittedly exempt.  This is demonstrated by the fact that the diagnostic tests are carried out by the laboratories and supplied to the Appellant, which makes onward supplies, of which the laboratories’ supplies are cost components, to the patients at a marked up price.
33.	Also, as the Tribunal has already concluded, the services supplied by the Appellant are not the same as the services which are supplied by the laboratories.  Therefore the question whether the Appellant’s services would be exempt on a proper interpretation of Note (2) (or of article 13A(1)(b) of the Sixth Directive) but for the form in which the Appellant carries on its activity of making supplies (ie. not as a registered medical practitioner or as an employer of such) does not arise.  The Tribunal sees no basis to hold that Note (2) is ultra vires the Sixth Directive.
34.	The appeal is therefore dismissed.  The Commissioners made no application for costs.

JOHN WALTERS  QC
   CHAIRMAN
   RELEASE DATE: 20 October 2005

LON/03/737