20963

VAT – Principal VAT Directive of 28 November 2006 article 132.1 (b) and (c) – whether services of collecting, testing, processing and storage of umbilical cord blood stem cells for future therapeutic use exempt from VAT in whole or in part – reference to European Court of Justice

MANCHESTER TRIBUNAL CENTRE			                     

 
 	
					FUTURE HEALTH TECHNOLOGIES LTD	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	David Demack (Chairman)

Sitting in public in London on 11 December 2008

Roger Thomas of counsel instructed by the Appellant
 
Ian Hutton of counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009
DECISION

Introduction
1.	This appeal is concerned with the proper interpretation of Article 132.1 (b) and (c) of Council Directive 2006/112/EC of 28th November 2006 on the common system of value added tax (‘the Principal VAT Directive’) and in particular whether the provision of services by Future Health Technologies Limited (“FHT”) consisting in or related to the collection, testing, processing and storage of umbilical cord blood stem cells for future therapeutic use may be exempted from VAT in whole or in part under one or other of those provisions. 
2.	The case for FHT was presented by Mr. Roger Thomas of counsel and that for the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”) by Dr. Ian Hutton, also of counsel.  They presented me with the following statement of facts and draft questions for a possible reference to the Court of Justice of the European Communities.
The facts
3.	FHT is a UK private limited company incorporated on 3 May 2002 which was registered for VAT with effect from 1 August 2004.  FHT is accredited by the Medicines and Healthcare products Regulatory Agency (an executive agency of the UK’s Department of Health) for the supply of Haemopoietic Progenitor Cells within the Department of Health’s accreditation scheme for tissue banks in the Public Sector; and is licensed by the Human Tissues Agency (the Competent Authority in the UK under the new EU Tissues and Cells Directives) as a Private Stem Cell Bank.  As a result of the breadth of its accreditation and licensing, FHT is able to make the stored stem cells available both for the treatment of the child from whose cord blood the cells were extracted (autologous use) and for the treatment of other members of the family of the child, or indeed, other unconnected persons (allogeneic or heterologous use).
4.	Stem cells for medical application are collected at birth. This is the time that the blood is richest in stem cells and these cells are of the highest quality.  The cells processed and stored by FHT are for medical use only. They are not available for research or experimentation.  The stem cells are extracted for the purpose of protection, maintenance and/or restoration of the health of the donor.
5.	Stem cell transplant therapy has become a standard medical procedure in the treatment of various forms of leukaemia, blood disorders, anaemias and autoimmune conditions. Clinical trials and experimental treatments using stem cells have been conducted for multiple sclerosis, diabetes and organ repair.  It is predicted that the uses of stem cells will increase in the future.
6.	The dispute arises because HMRC have ruled that the services supplied by FHT under the terms of its contract with the parents of the child are to be treated as a single, composite, taxable supply of storage services.  A copy of the contract (‘the Contract’) is to be found as Appendix 1 to this Statement of Facts.  A copy of the decision letter is to be found as Appendix 2.  A copy of the information pack made available to potential clients is included as Appendix 3.
Background
7.	In each case the transactions which will or may occur in consequence of FHT agreeing to provide its services under the Contract are as follows:
a.	A Cord Blood Collection Kit is sent to the parents of the unborn child;

b.	The parents arrange (at their own expense) for a medical professional attending the birth to collect blood from the umbilical cord shortly after birth; 

c.	The blood is transported by medical courier to the FHT laboratory.  This is a purpose-built facility near Nottingham for the analysis and extraction of stem cells from the cord blood;

d.	Employees of FHT test the blood to ensure that it is not contaminated with any medical condition that could be transmitted via the blood.  This testing occurs soon after birth and again after 6 months;

e.	The blood is then processed to extract a sample of stem cells suitable for medical application;

f.	The stem cell sample is cryopreserved and stored ready for use;

g.	The sample is stored pending use in medical treatments; and

h.	The stem cell sample is released on request of the parents (until the child is 18 years old) for use in medical treatment.
8.	There are two options for payment under the Contract.  The first option involves the client in paying two fixed sums for all the services provided by FHT, including six months’ storage, together with a further annual sum for continuing storage of the stem cells.  The second option enables the client to pre-pay three fixed sums for all the services provided by FHT and for 20 years’ storage in advance.  The total price under the first option is £995 plus a further annual sum of (currently) £30 per annum.  The total price under the second option is £1295.
Supervision
9.	The activities of FHT are directly supervised by Professor Paul H. Whiting BSC PhD FFRCPath FIBMS FSA(Scot) (CB) MRCMHC. Professor Whiting is registered as a Clinical Scientist with the Health Professionals Council and, as such, is a health professional listed under the Health Professional Order 2001. He is also a fellow of the Institute of Biomedical Science. He is responsible for the development of policies on donor suitability and care, providing advice on donor infection risk and recalls, establishing and maintaining systems for clinical feedback and authorisation of all documentation relating to donor suitability. This involves overseeing all laboratory meetings and signing off on all microbiology reports. The supervision by Professor Whiting is required to ensure that FHT's procedures meet the highest possible standards and are consistent with current clinical science practice.
10.	HMRC guidance states that, in general, services provided by health professionals listed under the Health Professions Order 2001 are considered to be principally for the purpose of protecting, maintaining or restoring the health of the individual concerned and are therefore VAT exempt.
Costs to the customer (based on FHT supplies as listed above)
11.	The cost to UK customers taking the 20 year storage package, as mentioned in paragraph 6 above, is apportioned as follows:
•	Item (a) constitutes 15% of the total cost to the customer (requiring the payment of a fee of £200)
•	Any costs associated with item (b) are for the customer to arrange independently

•	Items (c), (d) and (e), the collection, processing, analysis and testing, constitute 62% of the total cost to the customer (requiring the payment of a fee of £795)
•	Item 7, the storage, constitutes 23% of the total cost (requiring the payment of a fee of £300).
Costs to FHT
12.	The costs incurred by FHT in providing the supplies detailed in paragraph 6 above are as follows:
•	Supply of Cord Blood Collection kit and administration 		 7%
•	Processing, analysis, testing and cryopreservation of a sample 	91%
•	Storage of the prepared sample					2%
Staff time
13.	The vast majority of the staff time relating to the delivery of the supplies under the Contract is associated with the testing, analysing and subsequent processing of the blood.  Once the stems cells have been extracted, the staff time associated with moving the samples to the storage facility amounts to a matter of minutes.  The storage facilities, including the back up systems, are fully automated. The staff time associated with storage, once the samples are cryopreserved is minimal.
The domestic legislation
14.	Section 31 Value Added Tax Act 1994 (‘the Act’) provides that a supply of goods or services is an exempt supply if it is of a description for the time being specified in schedule 9 to the Act.
15.	Group 7 of Schedule 9 to the Act describes the following supplies (inter alia) as exempt:

a.	Item 1
The supply of services in the provision of medical care by a person required or enrolled in … (c) the register kept under the Health Professions Order 2001.

b.	Item 4
The provision of care or medical or surgical treatment and, in connection with it, the supply o any goods, in any hospital or state regulated institution.

c.	Item 7
Products for therapeutic purposes, derived from human blood.

d.	Item 8
Human (including foetal) organs or tissue for diagnostic or therapeutic purposes or medical research.
The dispute
16.	On 3rd April 2007 HMRC by letter addressed to FHT ruled that supplies by FHT consisting in the collection and testing of stem cells were exempt under the Act, Schedule 9 Group 7 item 8 (supply of human (including foetal) organs or tissue etc).  In consequence FHT was treated as a partially-exempt trader, making both exempt supplies (as described above) and taxable supplies of storage.
17.	On 14th March 2008, HMRC by letter addressed to FHT revoked the previous ruling and issued a new ruling that the testing and analysis by FHT of a customer’s own blood was incapable of falling within Schedule 9 Group 7 item 8, on the ground that the Company could not make a supply to a customer of his own human tissue.  FHT does not dissent from that ruling.  However, HMRC further ruled that:
a.	If the contractual arrangements between FHT and its client constituted a composite supply of services, that supply was to be regarded as a principal supply of storage to which the supply of the services of testing, analysis, processing and cryopreservation were to be treated as ancillary; and  

b.	The storage of stem cells was not to be treated as ‘care or medical or surgical treatment’ within Group 7 item 4; but

c.	If the arrangements were to be regarded as involving separate supplies, the supplies of testing, analysis and processing did not fall to be exempt under Item 1 of Group 7 of Schedule 9 because they did not involve medical care, even though provided by registered health professionals.
18.	FHT duly appealed to the VAT Tribunal against the decision of HMRC in accordance with section 83 of the Act, on the grounds that:
a.	The supplies made by FHT constitute a single composite supply consisting in the provision of prophylactic medical care in the exercise of the medical and paramedical professions as defined by the United Kingdom, the Member State concerned, in accordance with Article 132.1 (c).

b.	The supplies made by FHT constitute a single composite supply of hospital and/or medical care and/or activities closely related to hospital and medical care undertaken by a body governed by public law or under social conditions comparable with those applicable to bodies governed by public law, by a hospital, centre for medical treatment or diagnosis or by another duly recognised establishment of a similar nature, in accordance with Article 132.1 (b) of the Principal VAT Directive.

c.	Alternatively, if the supplies made by FHT do not constitute a single composite transaction, the supplies of collection, testing, analysing, processing and cryopreserving, as well as that of making of the stem cells available in due course for therapeutic purposes, are each exempt transactions within Article 132.1 (b) and (c) of the Principal VAT Directive.
Similar proceedings
19.	The parties and the referring Tribunal are aware that there is an existing reference to the Court of Justice for a preliminary ruling from the Ostre Landsret (Eastern Regional Court) Denmark lodged on 19 June 2008 in Case C-262/08, Copygene A/S v Skatteministeriet.  That reference concerns whether the relevant activities in that case (which are similar but not identical to the activities in this case) should be treated as within the exemption in Article 13A(1)(b) of the Sixth VAT Directive on the ground that the supplies constitute an activity “closely related” to hospital care. However, the Danish Court has not referred questions relating to Articles 13A(1)(c) and/or Article 132(1)(c), neither has it addressed the question whether the activity might in itself constitute “medical care” within the wide definition given to that phrase in previous cases.
20.	In those circumstances, the referring tribunal has determined to refer the following questions to the Court of Justice for a preliminary ruling, and respectfully suggests to the Court that it is appropriate for the present appeal to be dealt with together with the Copygene appeal.
21.	At the joint request of the parties and against the following legislative background I refer the questions below to the European Court of Justice:
‘Article 132.1(b) and (c) of the Principal VAT Directive provide as follows:

1.  Member States shall exempt the following transactions:

	…

(b)	hospital and medical care and closely related activities undertaken by bodies governed by public law or, under social conditions comparable with 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;
(c)	the provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned;

Questions:
1.	In circumstances where a Member State accepts that services are carried out by an establishment falling to be treated as a duly recognised establishment of a similar nature to a hospital or a centre for medical treatment or diagnosis within Article 132.1(b) of the Principal VAT Directive, is the expression “hospital and medical care” in Article 132.1(b) to be interpreted as including the aggregate of or, alternatively, one or more of (and if so which) services of the following descriptions (as more fully described in the Agreed Statement of Facts):

a)	The provision to the parents of an unborn child of a kit of the necessary medical equipment to enable an independent medical professional attending the birth to collect blood from the umbilical cord of the child shortly after birth;
b)	The testing of the blood thereby collected at a purpose-built facility for the purpose of ensuring that it is not contaminated with any medical condition that could be transmitted via the blood or via an extract of stem cells from the blood in the event of the therapeutic use of the stem cells (with similar testing occurring again after 6 months)
c)	The processing of the said blood by and under the supervision of suitably-qualified medical professionals to extract a sample of stem cells suitable for therapeutic medical use;
d)	The storing of the blood and stem cells in scientifically controlled conditions designed to maintain and preserve the blood and stem cells in perfect condition; and/or
e)	The releasing of the blood on request of the parents (until the child is 18 years old) for use in medical treatment?

2.	Alternatively, should the concept of activities that are “closely related” to hospital and medical care in Article 132.1(b) of the Principal VAT Directive be interpreted so as to include all or any (and if so which) of the above services? 

3.	In circumstances where a Member State accepts that the said services are carried out by or under the supervision of one or more suitably-qualified medical professionals, is the expression “the provision of medical care” in Article 132.1(c) of the Principal VAT Directive to be interpreted as including the aggregate of or, alternatively, one or more of (and if so which) services of the following descriptions (as more fully described in the Agreed Statement of Facts):

f)	The provision to the parents of an unborn child of a kit of the necessary medical equipment to enable an independent medical professional attending the birth to collect blood from the umbilical cord of the child shortly after birth;
g)	The testing of the blood thereby collected at a purpose-built facility for the purpose of ensuring that it is not contaminated with any medical condition that could be transmitted via the blood or via an extract of stem cells from the blood in the event of the therapeutic use of the stem cells (with similar testing occurring again after 6 months)
h)	The processing of the said blood by and under the supervision of suitably-qualified medical professionals to extract a sample of stem cells suitable for therapeutic medical use;
i)	The storing of the blood and stem cells in scientifically controlled conditions designed to maintain and preserve the blood and stem cells in perfect condition; and/or
j)	The releasing of the blood on request of the parents (until the child is 18 years old) for use in medical treatment?

DAVID DEMACK
CHAIRMAN
Release Date: 23 February 2009
MAN/08/1047

Appendix 1: the Contract

Appendix 2: the Decision Letter