England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE VAT & DUTIES TRIBUNAL

		Royal Courts of Justice Strand, London, WC2A 2LL
		16th December 2005

The Chancellor :

Introduction
1. The supply of services and building materials in relation to the construction of a building intended for use solely for a relevant residential purpose is zero-rated pursuant to s.30 of and Schedule 8 Group 5 items 2 and 4 to VAT Act 1994. The definition of a relevant residential purpose contained in Note (4) thereto includes use as

"a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of....past or present mental disorder."

The same note excepts from all parts of the definition:

"use as a hospital, prison or similar institution or an hotel, inn or similar establishment."

By note (12) (b) thereto

"a...supply....shall not be taken as relating to a building intended for such use unless before it is made the person to whom it is made has given to the person making it a certificate....stating that...the supply...so relates."

2. Fenwood Developments Ltd ("Fenwood") carries on the business of civil engineers. By a contract dated 13th April 2000 Fenwood agreed with Pastoral Homes Ltd ("Pastoral") to construct a mental home to be known as the Dene, Gatehouse Lane, Goddards Green, Hassocks, West Sussex, BN6 9LE. The work was carried out between February 2000 and 23rd May 2001 and, in accordance with a certificate as required by Note (12)(b) given by Pastoral to Fenwood in February 2000, VAT was not charged by Fenwood on the 17 invoices for a total sum of about £5.4m submitted by Fenwood to Pastoral and duly paid by Pastoral. On completion the Dene was registered as a mental nursing home as defined by s.22 Registered Homes Act 1984 pursuant to the provisions of Pt II of that Act.
3. While the Dene was in course of construction, namely on 9th August 2000, the shares in Pastoral were sold by the holders thereof to a subsidiary of General Healthcare Group Ltd ("GHC") called Partnerships in Care Ltd ("PiC"). In November 2000 PiC asked Fenwood to confirm the zero-rating of the construction of the Dene, which, after communicating with HM Customs & Excise, Fenwood did on 11th January 2001. Seemingly the accountants for GHC were still not satisfied and in May 2001 contacted the National Large Business Unit of Customs & Excise in London. In consequence one of their officers, Linda O'Sullivan visited the Dene on 18th July 2001 to make a physical examination and to discuss its organisation and operation with its administrators.
4. On 7th August 2001 Ms O'Sullivan wrote to the accountants for GHC describing what she had found on her visit to the Dene. She concluded:

"It seems to me that the Dene fails the requirement for zero-rating under two provisions. The Dene is similar to a hospital and a prison. I therefore do not accept that the construction of the Dene was eligible for zero rate relief under the provisions of Group 5 of Schedule 8 to the VAT Act 1994."

5. The matter was then referred by GHC to Fenwood, whose VAT adviser took it up with Ms O'Sullivan in a letter of 4th October 2001. Further meetings and correspondence between GHC's accountants and Ms O'Sullivan also ensued. On 4th March 2002 officers of Customs & Excise visited the offices of Fenwood. On 15th March 2002 the assessment with which this appeal is concerned was made by Mr Logan pursuant to the provisions of s.73 VAT Act 1994, that is to say to the best judgment of the Commissioners of Customs & Excise. By a notice dated 11th April 2002 Fenwood appealed to the VAT and Duties Tribunal (Mr David Demack and Mr Arthur Brown) by whom the matter was heard in January 2005. The decision of the Tribunal was released on 8th March 2005.
6. The Tribunal allowed Fenwood's appeal and discharged the assessment. They concluded that the Dene was not a prison or similar institution; nor was it a hospital or similar institution because it did not treat patients but cared for them. Accordingly the assessment was wrongly made. In addition they held that the assessment was not made to the best judgment of the Commissioners of Customs & Excise within s.73 VAT Act 1994 because they had considered the actual use of the Dene by GHC and not, as Note 4 required, the intended use of Pastoral and PiC.
7. This is the appeal of Commissioners of Revenue and Customs ("CR&C") from the order of the Tribunal under s.11 Tribunals and Enquiries Act 1992. They contend that:

(1) the Tribunal wrongly construed and/or applied the relevant provisions of Group 5 in determining that the Dene was not either (a) a hospital or similar institution, or (b) a prison or similar institution;

(2) the Tribunal was wrong to conclude that the assessment had not been made to 'best judgment' because CR&C was entitled to use current actual use as the best evidence of intended use, that they had done so with the consequence that the correct test had been applied.

I will deal with those issues in that order but first I should set out the relevant statutory provisions in full and refer to the decision of the Tribunal in more detail.

The Statutory Provisions
8. As the issues in this case relate to zero-rating, as opposed to exemptions, there are no relevant provisions of any EU Directives to be taken into account. The provision for zero-rating relevant to this case is to be found in Items 2 and 4 of Group 5 which provide for zero-rating supplies of services and building materials in the construction of a building "intended for use solely for a relevant residential purpose". Relevant residential purpose is defined in Note (4) as meaning:

"(4) Use for a relevant residential purpose means use as—

 (a) a home or other institution providing residential accommodation for children;

 (b) a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder;

 (c) a hospice;

 (d) residential accommodation for students or school pupils;

 (e) residential accommodation for members of any of the armed forces;

 (f) a monastery, nunnery or similar establishment; or

 (g) an institution which is the sole or main residence of at least 90 per cent. of its residents,

except use as a hospital, a prison or similar institution or an hotel, inn or similar establishment."

The decision of the VAT and Duties Tribunal
9. The hearing before the Tribunal took place on 19th and 20th January 2005. The evidence before them consisted of an agreed statement of facts, a bundle of correspondence and witness statements from Mr Philip Marsh, Ms O'Sullivan and Mr Logan. Mr Marsh described himself as the founder and director of Pastoral between 1995 and 2000. He was cross-examined on his statement.
10. The Tribunal did not say in terms that they accepted the evidence of Mr Marsh, but it is evident that they did for their relevant findings of fact do not, in any material respect, depart from his witness statement. Nor, of course, do they depart from the agreed statement of facts. Their findings contained in paragraphs 11 to 13 were:

"11. Pastoral's philosophy was one of providing a care-based system to its female patients; its patients were usually the victims of severe sexual or physical abuse, and it intended them to live as normally as possible. It took only patients for whom ordinary psychiatric hospitals could do no more, and aimed to provide them with a home, if necessary, for life.

12. Pastoral typically offered homes to women who had been detained under the terms of the Mental Health Act 1983 ("the 1983 Act"), such detention commonly been known as sectioning. But being under section was not a requisite of residence at the Dene. Before admission to a Pastoral home, patients would have been admitted to a hospital for preliminary diagnosis, assessment and treatment. Treatment they might have received prior to admission to a Pastoral home would have included ECT (electro convulsive treatment), intensive psychological intervention, and regular assessment. Pastoral did not provide any diagnostic services, for those for whom it catered could not be treated in the conventional sense. Essentially it offered accommodation for women who no longer needed, or could no longer benefit from, hospital treatment, e.g. those diagnosed as having personality disorders, a history of self-harm, being labelled as difficult to manage, or having been socially or educationally deprived. Pastoral did not accept patients in an acute phase of illness, and any of its patients who needed acute intervention were transferred to hospital for treatment. The accommodation was intended to become their permanent residence for the foreseeable future. To that end they were invited to decorate it to their own taste, and furnish it. They were allowed to keep pets. Short stay patients were not admitted.

13. Pastoral's objective was to encourage its patients to live full lives within whatever constraints and limitations their mental conditions necessarily imposed upon them. It aimed to supply care, rather than specific treatments. Its model of care was not treatment based. Residents went out for meals, attended courses outside the Dene in subjects such as computer studies, went horse riding, attended church, sometimes unaccompanied. To assist them they received allowances similar to pocket money. Their names were included on the local electoral roll."

The conclusions of the Tribunal on the various issues before them are succinctly expressed in paragraphs 46 and 50 to 53. I shall refer to them when considering the submissions made to me on this appeal.

Hospital or similar institution
11. The Tribunal rejected the contention of CR&C that the Dene was intended for use as "a hospital or similar institution". They adopted as the meaning of the word 'hospital' a dictum of Denning LJ in Minister of Health v General Committee of the Royal Midland Counties Home for Incurables at Leamington Spa [1954] 1 Ch.530, 547 that a hospital is an institution whose main purpose is to treat patients for their illnesses by the exercise of professional skill, as opposed to taking care of them only. They concluded in paragraphs 50 and 51:

"50. It will be recalled that we earlier found that Pastoral took only patients for whom ordinary psychiatric hospitals could do no more, intending to provide them with a home, if necessary for life; its philosophy was care based; it aimed to supply care rather than specific treatments; and it did not accept patients in an acute phase of illness, and transferred to a hospital any patient whose condition necessitated acute intervention. Those for whom it catered could not be treated in the conventional sense.

51. Viewed against that factual background, we conclude that the main purpose of the Dene, as operated by Pastoral, was to take care of its residents and make life more comfortable for them, rather than to treat them for their various conditions by the exercise of professional skill. It follows that we hold that the Dene was not intended to operate as a "hospital or similar institution". We also hold that it was a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of past or present mental disorder within note (4)(b)."

12. Counsel for CR&C did not criticise the test for recognition of a hospital adopted by the Tribunal. In addition he accepted that the proper test was the intended use of the building at the time the relevant supplies were made. In that connection he submitted that the Tribunal was wrong to look for the main purpose of the Dene as indicated in the first sentence of paragraph 51. His principal submission was that the Tribunal could not have reached the conclusions they did had they paid proper regard to the evidence before them. In this connection he relied three broad propositions, namely, (1) the effect of detention under the Mental Health Act 1983, (2) the effect of registration as a mental nursing home under the Registered Homes Act 1984 and (3) references in the documents before the Tribunal indicating that patients to be accommodated in the Dene would need treatment in addition to care.
13. Before considering those three broad propositions it is convenient to refer to the submissions of counsel for Fenwood as to the meaning of the phrase 'hospital or similar institution'. He pointed out that the dictum of Denning LJ in Minister of Health v General Committee of the Royal Midland Counties Home for Incurables at Leamington Spa [1954] 1 Ch.530, 547 was based on statutory definitions of the words 'hospital' and 'treatment' in National Health Service Act 1946, which are not to be found in the VAT Act 1994, and was a dissenting judgment anyway. He suggested that the focus of Note (4) in the context of Group 5 is on the intended use of buildings for residential accommodation, as opposed to short term occupation. He submitted that a hospital is a building used for treatment for the cure or amelioration of a medical condition as opposed to personal care; the former is likely to require short term occupation, the latter long-term residence.
14. I do not derive assistance as to the meaning of the relevant phrase in Group 5 in Schedule 8 to VAT Act 1994 from any of the judgments in Minister of Health v General Committee of the Royal Midland Counties Home for Incurables at Leamington Spa [1954] 1 Ch.530. In that case the Court of Appeal was considering the construction and application of statutory definitions which may or may not reflect the meaning of the word 'hospital' when used in Note (4) in the context of Group 5 in Schedule 8. The point is amply demonstrated by the fact that the Court of Appeal in that case was assisted by the decision of the Court of Session in Royal Victoria Hospital, Dundee v Wheatley in which it had been held that what is now called a hospice was a hospital for the purposes of the National Health Service Act 1946. But, in terms of note (4), that institution would fall precisely within sub-paragraph (c) and could not be excluded by the concluding words. Further a precise ascertainment of the meaning of the word 'hospital' is insufficient because there is also excluded a 'similar' institution. And how similar does an institution have to be? As counsel for Fenwood pointed out there are no decided cases on the meaning of the words 'hospital' or 'similar' in the context of Group 5.
15. Similarly I derive no help from the various statutory definitions to be found in various other statutes. I was referred to the definitions of 'hospital' and 'illness' in s.128 National Health Service Act 1977 and of 'hospital' and 'medical treatment' in Mental Health Act 1983. They may or may not accurately reflect the meaning of the words 'hospital or similar institution' in Group 5 of Schedule 8 to VAT Act 1994. But it is to be noted that s.1(1) Registered Homes Act 1984 contains a definition of 'residential care home' in the substantially same terms as Note (4)(b).
16. Accordingly the starting point must be the ordinary meaning of the word 'hospital'. The relevant meaning given in the Shorter Oxford English Dictionary is "an institution for the care of the sick and wounded, or those who require medical treatment". In Collins English Dictionary it is "an institution for the medical, surgical, obstetric, or psychiatric care and treatment of patients". Chambers 21st Century Dictionary defines the word as "an institution, staffed by doctors and nurses, for the treatment and care of people who are sick or injured". The common element in all these definitions is the provision of medical treatment and care.
17. The context of Group 5 is also important. Zero-rating is allowed in respect of services and building materials supplied in connection with a building intended for use "solely for a relevant residential purpose". Note (4) defines what is a relevant residential purpose. Paragraphs (a),(b),(d),(e) and (g) all refer expressly to residential accommodation. Paragraphs (c) and (f) plainly imply the same quality.
18. In their normal meaning neither hospitals, prisons, hotels nor inns exist for the purpose of providing residential accommodation; nor are they normally occupied as residences by those who are accommodated therein. Thus the exceptions appear to me to be designed to exclude the specified institutions if and insofar as their use might actually come within the principal parts of the definition. Accordingly, it is necessary in each case to contrast the relevant paragraph of Note (4) with the relevant part of the exception. If, as is accepted in this case, the Dene is "a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of past or present mental disorder", then it can only be excluded if its use is as a hospital or similar institution. The contrast is between a home or institution providing residential accommodation with personal care for those who need it for the prescribed reason and an institution providing medical treatment and associated care, usually on a short term basis. Accordingly I accept the submission of counsel for Fenwood summarised in the last sentence in paragraph 13 above as reflecting the proper construction of the relevant words in the appropriate context.
19. Given that construction, it seems to me to be plain that on the findings of the Tribunal set out in paragraph 10 above the Dene is not a hospital or similar institution unless the submission of counsel for the Revenue that such findings are perverse can be made good. Accordingly I now deal with the three broad propositions described in paragraph 12 above, bearing in mind that there is no appeal on questions of fact.
20. In paragraph 12 of their decision the Tribunal found that Pastoral typically offered homes to women who had been detained under the Mental Health Act 1983. Counsel for CR&C pointed out that such detention could only be justified if the patient suffered from an illness which made it appropriate that he receive medical treatment in a hospital, see s.3(2). If, he submitted, it was appropriate for the typical resident to receive medical treatment then, at the least, the Dene was an institution similar to a hospital.
21. In my view, counsel for CR&C seeks to place on the reference in paragraph 12 to a typical resident a weight it will not bear. First, it is apparent that the Act includes in the word 'hospital' a 'mental nursing home', see s.34(2). Second, in that Act 'medical treatment' includes 'care, habilitation and rehabilitation under medical supervision', see s.145. Thirdly, the subsequent sentences of paragraph 12 of the Tribunal's decision make it clear that such persons were admitted to the Dene because they needed a home, not because they needed medical treatment for their mental disorder. In reaching that conclusion the Tribunal accepted paragraph 6, 12 and 13 of the witness statement of Mr Marsh. In my view that was a conclusion to which they were entitled to come.
22. The second broad proposition is that the Dene was registered on 23rd May 2001 under s.22 rather than s.1 of the Registered Homes Act 1984. The former provision relates to a mental nursing home defined as

"premises used or intended to be used for the reception of and the provision of nursing or other medical treatment (including care, habilitation, and rehabilitation under medical supervision) for, one or more mentally disordered patients...whether exclusively or in common with other persons."

S.22(2) makes it clear that a national health or local authority hospital is not included. By contrast s.1 requires the registration of

"any establishment which provides or is intended to provide...residential accommodation with both board and personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs, or past or present mental disorder."

23. Counsel for CR&C submits that the actions of GHC/PiC/Pastoral in effecting such a registration on the very day the Dene was completed indicates clearly an intention to use it for the purpose of a mental nursing home as defined and that such an institution is or is similar to a hospital for the purposes of Note (4). He submits that the Tribunal failed to have regard to this consideration and points out that it is not referred to anywhere in their decision.
24. Counsel for Fenwood points out that a mental nursing home was excluded from the requirement to register under s.1, see s.1(5). He submits that the actual registration is of no assistance because it signifies no more than what the parties considered that statute to require. They may have been right or wrong but, either way, it is immaterial to the question of the proper construction and application of Note (4).
25. It is clear from the decision of the Tribunal that they were well aware of this point. They adverted to it in paragraphs 9, 24, 41 and 42. It is true that they did not express any specific conclusion in respect of it but they must have rejected it to have reached the conclusion that they did. In my view they were right to reject it for substantially the reasons given by counsel for Fenwood and summarised in paragraph 24 above.
26. I turn then to the third broad proposition, namely that the Tribunal failed to pay sufficient regard to various references in the documents before them. The documents to which counsel referred and the passages within them were (1) printed guidance from the West Sussex Health Authority with regard to the functions and staffing needs of a mental nursing home, (2) a publication put out by Pastoral with regard to the facilities and services provided at its Annesley Park establishment, (3) a ten page publication by Pastoral as to its 'Strategy for the Development of Women Only, Forensic Services and Standards to be met' and various statements made in it and (4) the application of Pastoral for registration under Registered Homes Act 1984 indicating that the in house services to be provided included physiotherapy, occupational therapy and psychiatry.
27. All these documents were before the Tribunal. As such they were available to be used, and for all I know were used, in the cross-examination of Mr Marsh. It is clear from paragraphs 11 to 13 of the Tribunal's decision that they accepted the evidence of Mr Marsh in all relevant respects. In truth this part of the submissions of counsel for CR&C invites the court to entertain an appeal on questions of fact. Such an appeal is not permissible under s.11 Tribunals and Enquiries Act 1992 or otherwise. Accordingly I reject this proposition too.
28. For all these reasons I conclude that the Tribunal were right to hold that the intended use of the Dene at the time Fenwood supplied its services and building materials in its construction was not as a hospital or similar institution.
Prison or similar institution
29. The Tribunal rejected the submission of CR&C that the intended use of the Dene was as 'a prison or similar institution'. They concluded in paragraph 46:

"Prisons are intended to accommodate only those convicted of criminal offences, or those remanded in custody pending trial for such offences. In those circumstances, we are not prepared to extend the meaning of "prisons or similar institutions" in the exception to note (4) to buildings intended to house anyone other than convicted criminals, or persons charged with criminal offences who have been remanded in custody. It follows that we hold that the Dene is not a "prison or similar institution".

30. Counsel for CR&C frankly accepted that if a prison or similar institution must exhibit some penal aspect then the Dene was not such an institution. He contended that no such aspect was required. By contrast the Dene was at least a similar institution because on any view it accepted patients detained under s.37 Mental Health Act 1983 who had, by definition been convicted of a criminal offence. If any such patient absconded she might be arrested. He suggested that the requirement of exclusive use introduced by the Tribunal went too far.
31. I do not accept these submissions. In my view a 'prison or similar institution' does require a penal element. The fact that some of the patients may have been convicted of an offence does not seem to me to be sufficient, when, even in the case of those patients, it was intended that they should be admitted to the Dene because they needed both residential accommodation and personal care. It was not intended that any of the residents of the Dene should be admitted because she had committed an offence. Further the intended regimen for a resident was neither punitive nor rehabilitatory in a penal sense.
32. In my judgment the Tribunal was right to conclude that the intended use of the Dene at the time Fenwood supplied the relevant services and materials was not as a prison or similar institution.
Best Judgment
33. Given that I have concluded that the Tribunal was right to have held that the assessment under appeal was bad in law, it is of only academic interest to consider whether it was originally made "to their [sc. of Customs & Excise] best judgment". But, in case the matter goes further I should shortly explain the point and my conclusion on it. It arises from the letter from Ms O'Sullivan to which I referred in paragraph 4 above. The description of what she found on her visit to the Dene on 18th July 2001 was all expressed in the present tense and set out in five numbered paragraphs. But her conclusion as expressed in the passage I have quoted in paragraph 4 can only be justified on the basis of the use intended by Pastoral/GHC/PiC at the time the relevant services were supplied. That was not necessarily the same as the actual use some three months later following a change in ownership.
34. Fenwood submitted that unless Ms O'Sullivan directed her mind to the intended use and inferred that it was the same as the actual use three months later the assessment could not have been lawfully made. To that extent it would have been arbitrary. This submission found favour with the Tribunal. They concluded in paragraph 53

"It is plain from Miss O'Sullivan's letter of 7 August 2001 that the Commissioners did apply the wrong test in deciding that Fenwood's supplies to Pastoral were standard-rated. And whilst we accept Mr Poole's point that in making their decision the Commissioners were entitled to consider the actual use of the Dene shortly after it opened, that does not excuse their failure to apply the correct test. We need merely say that the Commissioners erred in considering only the actual use of the Dene following its completion. In those circumstances, in our judgment the assessment under appeal must have been made arbitrarily, and therefore not to best judgment."

35. Counsel for CR&C submitted that there is no merit or justification for this conclusion. He took me through the correspondence between the various officials of Customs & Excise and either Fenwood, Pastoral or GHC and pointed out that no one had ever suggested that there was any difference between the use that was intended and the use that was ultimately made of the Dene. The first suggestion that there was any difference came in paragraph 18 of Mr Marsh's witness statement.
36. It would have been understandable if CR&C had made the point that the actual use was, prima facie, the best evidence of intended use so that in the absence of any indication to the contrary CR&C might infer that the intended use was the same as the later actual use. In the absence of any evidence of a change of plan such a submission is likely to have been accepted by the Tribunal. Whether or not such a submission was made orally it was not the case advanced in writing. The amended statement of case filed on behalf of CR&C on 12th May 2004 asserted that

"The Dene is an institution used as a hospital....or as an institution similar to a hospital." [emphasis added]

There is no allegation as to the relevant intention to be found in either the original assessment or the amended statement of case.

37. The exercise of any statutory power by CR&C or any other arm of the executive must, if challenged, be justified. The assessment was challenged. The justification relied on was bad in law. It follows that the assessment would be liable to be set aside on this ground even if it were otherwise correct in law.
Summary of Conclusions
38. For all these reasons I conclude that the Tribunal was right on all three issues raised before them. I dismiss the appeal.