LIFE Services – The scope of the VAT welfare exemption
This is an interesting case that may be of eventually great importance to those providing welfare services. Or since the judgment is based on EU law, it may not. It’s also interesting since it illustrates how Government policy changes can have unforeseen VAT impacts. The judgment is that of the First Tier Tax Tribunal and concerned whether a profit making body that provided day care services to adults with disabilities was making taxable supplies – as contended by HMRC or exempt supplies as contended by the company – LIFE Sevices.
The services were of a type that it was agreed would be regarded as welfare for VAT purposes. UK VAT legislation treats the provision of welfare services by a charity or a state regulated profit making body as VAT exempt. Had LIFE been a Charity then there is no question that its supplies would have been exempt. But as a non charitable profit making body the applicability of the exemption hinged upon whether its care activities were state regulated.
The Court considered the state regulation question and concluded that as they were provided in the homes of those being cared for, that they were exempted from needing to be registered under the Health and Social Care Act. Exemption from registration was not state regulation and neither was the registration they had with the County Council, that mainly funded the services. Not being state regulated meant that LIFE should have charged VAT under UK law.
However, the Court found for LIFE on the grounds that charging VAT was contrary to the principle of fiscal neutrality which is a principle of interpretation applied to EU VAT law. Essentially the same service should not have different tax treatments if supplied by different providers unless this result is clearly intended in the EU legislation. It was wrong in this case for identical services to be treated differently and the services of LIFE could be VAT exempt. UK law was wrong.
It’s worth pausing to consider why they wanted that result. In most cases service providers that are funded by Council money seek to charge VAT since it allows them to recover VAT and the local authority can recover the VAT it is charged. This means that the service provider is better off. The reason that the state regulated condition was introduced was in fact to prevent this happening. So what’s different here.
The difference appears to be that the contractual arrangements are very often tripartite between the Council, the person being cared for and LIFE as service provider. In many cases the person being cared for is allocated a personal budget meaning that they are regarded as receiving the supply directly from the provider. This means it is the disabled person rather than the Council that is being charged VAT. In such a case then clearly its best for the supply to be exempt – hence I assume the appeal.
It follows therefore that the move to personal budgets has had a detrimental VAT consequence. This strikes me as unfortunate. Surely it must have been possible for the initiators of the policy in the Dept of Health to discuss the consequences with HMRC and work out a solution. The aim of personal budgets – to give the disabled person a feeling of control over their care could surely have been met within a structure that still allowed the supply to be seen as made technically to the funding local authority. In the recent work I have done on policy submission for various clients I am always amazed at how little different Government Departments talk to each other. Part of the answer here might be to better resource HMRC policy so they have more time to develop solutions – that and maybe encouraging a cultural change away from an assumption that other Departments policy should fit in with tax rules rather than the other way round. Whether Brexit will make this more likely remains too be seen.
But LIFE is a very good result and the correct result too. But what next. It was decided on a point of EU law. Will HMRC appeal it – I assume they will at least to the Upper Tribunal. But its a case that could well go higher and certainly theres a chance of a referral to the European Court since its on a European point. But all this will take more than 2 years. But what happens if a year down the line it is decided that EU law and principles of interpretation mean nothing. So whether LIFE eventually win the point or HMRC agree to change their policy are questions caught up in the question of the status of EU law post Brexit.
The case can be found here: http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j9177/TC05197.pdf