England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
REVENUE

		Royal Courts of Justice Strand, London, WC2A 2LL
		04/11/2005

Mr Justice Hart :

1. This is an appeal by the Commissioners of Revenue and Customs against a decision of the VAT and Duties Tribunal dated 18th April 2005 ("the Decision"). By that decision the Tribunal upheld an appeal by the respondent against a ruling by Customs that the services supplied by the respondent did not fall within the exemption contained in Item 9(b) of Group 7 of Schedule 9 to the Value Added Tax Act 1994.
2. Shortly before the hearing of this appeal, those representing the respondent informed Customs that it did not intend to contest the appeal on the basis (which Customs accepted) that Customs would not seek costs against it. The respondent has not accordingly been represented before me on the hearing of this appeal.
3. The respondent's business, so far as material, consists of the supply of the services of staff, who remain its employees, to private day nurseries, pre-schools and local education authority schools. Although the matter is not clearly dealt with in the Decision, the evidence given before the Tribunal on behalf of the respondent was that the respondent did not contract with its customers to manage or run the institutions to which it supplied staff, and that the staff so supplied were always subject to the direction and management of the hiring institutions.
4. The question before the Tribunal was whether the services supplied by the respondent to its customers were exempt supplies for the purposes of VAT. It was common ground that they could only be such exempt supplies if they fell under Item 9 to Group 7 of Schedule 9 to VATA. That identifies as an exempt supply:

"9. The supply by:-

(a) a charity

(b) a state-regulated private welfare institution or agency, or …

(c) a public body, of welfare services and of goods supplied in connection with those welfare services."

5. Notes (6) and (8) to Group 7 provide the following definitions:

"Notes:

(6) In item 9 "welfare services" means services which are directly connected with –

(a) the provisions of care, treatment or instruction designed to promote the physical or mental welfare of elderly, sick, distressed or disabled persons,

(b) the care or protection of children and young persons, or…

(8) In this Group "state-regulated" means approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to a provision of a public general Act, other than a provision that is capable of being brought into effect at different times in relation to different local authority areas."

6. Two issues arose on those definitions. The first was whether the respondent could be said to provide welfare services, it being the contention of Customs that the respondent supplied staff, not services. The second issue was whether the respondent could be described as "state-regulated" within the definition provided by Note (8).
7. On the first issue the Tribunal, after making findings of fact which it is unnecessary to rehearse, reasoned as follows in paragraph 18 of its Decision:

"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 of its supplies, with the supplies made by the kindergartens themselves."

8. That reasoning is criticised by Customs on the ground that it does not directly address the argument that what the respondent was supplying was the services of its staff rather than the welfare services themselves. It was submitted by Mr Puzey on behalf of Customs that the Tribunal had failed to give any weight to the fact (which was uncontested) that the respondent itself was not involved in any way in the management or running of the institutions to whom it hired staff, and that the staff so hired were subject to the direction and control of the hiring institution. Accordingly, Mr Puzey submitted, the services supplied by the respondent were only indirectly connected with the care of children. Moreover, the Tribunal's reference, in the second indent of paragraph 18 of its Decision, to the system of state control of carers was erroneous because the system of state control described by the Tribunal was a system of control exercised over the hiring institutions, rather than over the respondent or its staff.
9. Those criticisms seem to me to be well founded. That there is a distinction between the nature of the service supplied by the respondent (i.e. the supply of staff) and the service provided by the recipient of that supply seems to be clear both as a matter of principle and authority. So far as principle is concerned the distinction is itself drawn, or at least recognised, in the provisions of Article 13.1(g) and (k) of the Sixth Directive which does not envisage external supplies of staff as being equivalent to the direct provision of welfare services save in the one very specific circumstance expressly provided for by sub-paragraph (k) of that Article. So far as authority is concerned the distinction is well illustrated by the decision of Laws J. (as he then was) in Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588.
10. The fact that the institutions to whom the services of staff are supplied are themselves regulated by the State, and that such regulation includes the imposition of duties on those institutions in relation to the suitability of the personnel used by them in the delivery of welfare services, cannot in my judgment provide a basis for saying that the respondent is itself making supplies of welfare services.
11. On the second issue of whether the respondent was "state-regulated" as defined in Note (8), the Tribunal reasoned as follows:

"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."

12. That reasoning is criticised by Customs on the ground that it ignores the clear finding of the Tribunal (which was not in any way contentious) that the respondent:

"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…" (paragraph 13 of the Decision).

13. Accordingly, Mr Puzey submitted, the only basis upon which the reasoning in the Decision could be defended would be if it were possible to read the definition of "state-regulated" as extending to the indirect form of regulation identified by the Tribunal, namely the fact that the institutions to whom the respondents supplied services were themselves regulated, and that that regulation included regulation as to the qualifications and quality of the staff deployed by the regulated institution in the provisions of its services.
14. I agree with Mr Puzey's submissio n that there is simply no warrant in the language of the statute for so reading the definition. Even if it be correct to regard the hired staff as themselves being subject to a system of regulation (which seems to me to be far from established by the facts found by the Tribunal), it does not follow that the respondent itself can be described as "state-regulated". It is in my judgment unnecessary for this conclusion to have resort to the principle that exemptions are to be construed strictly (compare Sweden v Stockholm Lindo Parc A.B. [2001] STC 103 at paragraph 25), but that principle plainly reinforces that conclusion.
15. For those reasons I allow the appeal.