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Cheltenham Old People's Housing Society Ltd v Customs and Excise [2004] UKVAT V18795 (08 October 2004)

18795

Value Added Tax – zero-rated supplies – Group 12 of Schedule 8, VATA 1994 – installation by a charity of new heating system in residential care home for the elderly – whether supply to a charity for making available to handicapped persons for their use of equipment designed solely for use by a handicapped person - Items 2(g), 2(h) and 7 of Group 12 – heating system not designed solely for use by handicapped persons – whether supply to a charity of services of adapting goods to suit the condition of handicapped persons – Items 4 and 6 of Group 12 – works comprised installation of new equipment, not adaptation of goods – whether (in part) supply to a charity of a service of adapting a bathroom for use by a handicapped person – Items 11 and 13 – works did not comprise adaptation of a bathroom – appeal dismissed

LONDON TRIBUNAL CENTRE

CHELTENHAM OLD PEOPLE'S HOUSING SOCIETY LTD Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MR A E SADLER (Chairman)

MISS S WONG CHONG FRICS

Sitting in public in Birmingham on 27 and 28 July 2004

Mr Richard Vallat of Counsel, instructed by Messrs Hazlewoods, Chartered Accountants, for the Appellant

Mr Hugh McKay of Counsel, instructed by the Solicitor for the Customs & Excise, for the Respondents

DECISION

Summary of the appeal and the decision

This is an appeal by Cheltenham Old People's Housing Society Ltd ("the Appellant") against the decision of the Commissioners of Customs and Excise ("the Commissioners") that the supply of goods and services comprising the installation of a heating system with low surface temperature radiators and covered hot water pipes in a residential care home for elderly people does not comprise a zero-rated supply within Group 12 of Schedule 8, Value Added Tax Act 1994 ("VATA"). The Commissioners' decision to this effect is comprised in their letters of 8 February 2002 and 4 July 2002 to the Appellant's accountants. We were asked to determine the matter in principle, without reference to the detailed figures, but we understand that the amount of VAT for which the Appellant is liable should the supply be a taxable, and not a zero-rated, supply, is approximately £18,500.

The Appellant is a charity which runs two residential care homes and a nursing home. The heating system was installed in one of the residential care homes. The Appellant's primary case is that the heating system comprised equipment and appliances designed solely for use by a handicapped person and that the supply was therefore within Item 2(g) and (h) and Item 7 of Group 12 of Schedule 8, VATA, being a supply of such equipment and appliances (and related installation services) made to a charity for making available to handicapped persons by sale or otherwise for domestic or their personal use. Alternatively, the Appellant argues that the installation of the heating system comprised a supply within Items 4 and 6 of Group 12, being a supply to a charity of services (and a connected supply of goods) of adapting goods to suit the condition of handicapped persons. Alternatively, and in relation to part only of the supply, the Appellant argues that the installation of the heating system in the bathrooms of the home comprised a supply within Items 11 and 13 of Group 12, being a supply to a charity of a service of adapting bathrooms, washrooms or lavatories for use by handicapped persons in residential accommodation where such adaptation is necessary by reason of the condition of the handicapped persons.

The Commissioners argue that the Appellant fails in each of its submissions. As to the Appellant's primary case, the Commissioners argue that the Appellant cannot show that the heating system was designed solely for use by a handicapped person – the purpose of those who designed the heating system was to design a system for use by all the residents of the residential care home, only some of whom were handicapped. As to the Appellant's case that the installation of the heating system was a supply of services of adapting goods to suit the condition of handicapped persons, the Commissioners argue that there was no adapting of goods, but the installation of radiators and pipes which were installed as purchased. As to the Appellant's case that part of the supplies comprised adapting bathrooms for use by handicapped persons, the Commissioners argue that the replacement of one type of radiator with a low surface temperature radiator is not a change which is material enough to comprise an adaptation of the bathroom for use by handicapped persons.

It is our decision that the Appellant fails in its appeal on all three grounds. Although a significant proportion of the residents of the home are handicapped (as defined for Group 12 purposes) as well as elderly, it is our conclusion that neither the component parts of the heating system nor the heating system taken as an entity can be said to have been designed solely for use by a handicapped person – those who instigated, designed and installed the system acted with the interests in mind of all the residents, handicapped or otherwise. We consider that the installation of the new heating system in the circumstances of this case cannot reasonably be said to be an adaptation of goods within Item 4 of Group 12. As for the Appellant's third case, we agree with the Commissioners that the works involved do not amount to the adaptation of a bathroom for use by a handicapped person.

The evidence and the findings of fact

We made a site visit to Faithfull House, the Appellant's residential care home where the heating system was installed, and where we were able to see the work which had been carried out, and, as we walked about the home, we were able to see some of the residents. We heard evidence from the following witnesses who were called for the Appellant: Mr James Anthony Cox, the General Secretary and Chief Executive Officer of the Appellant from 1993 until June 2000 (Mr Cox was responsible for the decision to install the system and for instructing the engineering consultants who designed the system which was installed); Mr Stuart L Bennett, Mr Cox's successor as Chief Executive Officer of the Appellant (Mr Bennett supervised on behalf of the Appellant the tendering stages of the work, the appointment of heating engineers, and the installation by the engineers of the system in 2001); and Mr Simon Hewer, the managing director of D J Hewer & Co Ltd, the heating engineers who installed the system. We also had before us a witness statement in support of the Appellant prepared by Mr Kevin M Pugh, at the material times the operations director of Sure Foundation Building Services Limited, the engineering consultants who were appointed by the Appellant to advise on the installation of a low surface temperature heating system, who designed the system eventually installed, and who directed the installation of the system carried out by the heating engineers. Mr Pugh was not available to be called as a witness at the hearing of the appeal, and his evidence as set out in his witness statement could not therefore be challenged by cross-examination on behalf of the Commissioners. We therefore approach with some caution Mr Pugh's evidence on any matters of contention, but we note that, in the crucial area of the intentions of those designing the system, Mr McKay for the Commissioners found some support for his case in the witness statement of Mr Pugh. No witnesses were called for the Commissioners and Mr McKay limited himself to cross-examining the Appellant's wtnesses.

In addition we had a bundle of documents agreed between the parties. These covered the background to the decision of the Appellant to install the new heating system, including the reports made by the body which regulates the home; the instruction and appointment by the Appellant of the engineering consultants; the options available to the Appellant as laid out by the engineering consultants; the design and specification of the system chosen; the contract for the installation and the invoices for the work undertaken; and the correspondence between the Appellant's advisers and the Commissioners in relation to the work and the Appellant's claim to have the supplies zero-rated for VAT purposes.

From this evidence we find the facts set out in paras. 8 to 20.

The Appellant is a charity which operates under the name "The Lilian Faithfull Homes". It was formed in 1946, and its principal object, which it adheres to, is "to carry on, for the benefit of the community, the business of providing accommodation and associated amenities for elderly persons in necessitous circumstances upon terms appropriate to their means, and to provide for aged persons in need thereof, accommodation and any associated amenities specifically designed or adapted to meet the disabilities and requirements of such persons."

The Appellant owns and runs three homes in Cheltenham, one of which is Faithfull House, where the works relevant to this appeal were carried out. Faithfull House is a residential care home, providing long-term residential accommodation for up to 72 elderly residents. The minimum age for occupation of a room in Faithfull House is 65 years and the majority of the current residents are older than 85 years. The residents have moved to Faithfull House as their home, and they are encouraged to regard it as such, with as much independence as circumstances permit (to enter and leave as they wish and to receive visitors; to remain in their rooms or use communal dining and lounge facilities; to do their own laundry and clean their own rooms if they wish; to retain some of their own furniture and personal effects). Most will have moved into the home because, for one reason or another, they no longer wish to live independently in their own homes: perhaps because they are lonely, or are frail, or in some way find running a home themselves a burden which they no longer wish to bear.

Apart from age, there are no criteria imposed for admission to Faithfull House. In particular, it is not a requirement that a person seeking admission should be frail or disabled or be restricted in his or her mobility. Nursing care is not provided other than by occasional visits from the district nurse (the Appellant has a separate nursing home), so that those who require such care are not admitted, and residents who reach a stage where such care is required move out of Faithfull House.

Currently, (and in the absence of evidence it is assumed that the situation was not materially different when the heating system in question was planned in early 2000) one resident uses a wheelchair and approximately half of the residents require the use of an aid to mobility such as a zimmer frame, two sticks or a stick and handrail. Of the remaining residents, some will make occasional use of a stick or the arm of a care worker to steady or support themselves, and the rest are fully mobile without any assistance or aid. Faithfull House is a large old house with labyrinthine passages and stairways, and is fitted with wheelchair ramps, handrails, a passenger lift and stair lifts. There is no distinction, in terms of design, fittings or equipment, between individual residents' rooms occupied by those residents who are fully mobile and those who have mobility difficulties.

Faithfull House is subject to regulation by the appropriate unit of Gloucestershire County Council Social Services department. During the period from 1998 until 2000 the regulators expressed concern that the radiators of the heating system in Faithfull House could burn anyone who fell against them, especially if they fell and then had difficulty in moving away from the hot surface. The heating system had unprotected pipes running through the building and old cast iron ridged radiators without heat protection. The system functioned in the usual way, that is, by very hot water being pumped from the boilers through the pipes and radiators. The system was old, and radiator temperatures were difficult to control, but in other respects the system was fully functional and not in immediate need of repair, alteration or replacement. An Inspection Report of the regulator dated 24 June 1999 includes a requirement that the Appellant should, by 24 March 2000, "Provide thermostatic control on all radiators" and "Guard all hot surfaces". The "National Minimum Standards for Care Homes for Older People" set out by the Secretary of State for Health under the relevant provisions of the Care Standards Act 2000 in a statement dated March 2001 includes the following, as Standard 25.5: "Pipework and radiators are guarded or have guaranteed low temperature surfaces." This standard currently applies to Faithfull House, and we were asked to assume that a comparable standard applied under the predecessor legislation in force at the times material to this appeal, and that the regulator was requiring compliance with that standard.

In response to the requirements of the regulating body, the Appellant appointed Sure Foundation Building Services Ltd, engineering consultants, to make recommendations as to the way in which the heating system could be made compliant with the relevant standards and regulations. The letter of appointment is dated 30 September 1999, and is addressed to Mr K Pugh, who was familiar with Faithfull House and its residents from previous work carried out by his firm. The letter of appointment includes the following: "We have an elderly heating system in Faithfull House and because of the changes in the rules and regulations we are under pressure from the regulators to install radiators which have a low temperature exterior so that residents cannot fall against them and burn themselves."

Mr Pugh and his colleagues produced a feasibility study dated 21 February 2000 entitled: "Heating System Replacement Feasibility Study". In the introduction to that study it is stated that: "The existing central heating system at Faithfull House…does not comply with current Health and Safety guidelines, which advise on the risk of elderly persons falling against heated surfaces in buildings." The feasibility study proposed for consideration three possible courses of action in order to meet a requirement that recommended temperatures of heated surfaces of radiators, accessible pipes or panel type convectors should not exceed 43°C when the system is operating at the maximum design output: (1) fixing low surface temperature ("LST") casings to cover existing radiators together with boxing in exposed pipes; (2) retaining existing pipework (boxing in exposed pipes) and replacing old radiators with new LST radiators; (3) replacing the old pipework with a new two-pipe distribution system routed to minimise the amount of exposed pipework, and boxing in any exposed pipes, and replacing old radiators with new LST radiators. In each case the existing heating and hot water system boilers (four in number) were to be used, but the third option included the installation of an additional boiler, and renewal of valves, pumps, pipework and other components in the boiler-room. In each case the system used water heated up to 80°C. The feasibility study recommended that the third option should be adopted, on the grounds that the manufacturers of the casings proposed in the first option could not guarantee that the surface temperature of the casings would not exceed 43°C, and that if the existing (and ageing) pipework were retained (as in the first and second options), it might not stand a pressure test.

On 6 March 2000 the Appellant agreed to proceed with the replacement of the heating system, in accordance with the third option recommended by the engineering consultants. The engineering consultants proceeded to prepare a detailed specification of the work required as set out in the third recommended option. The Appellant appointed D J Hewer & Co Ltd, plumbing and heating engineers, to carry out the work in accordance with the specification and under the supervision and project management of the engineering consultants, and the work was completed by the end of August 2001. The work was carried out in accordance with the specification, subject to minor modifications (for example, in siting radiators or routing pipes) made when practical issues arose during installation.

Approximately 173 LST radiators were installed, replacing all the "old" radiators throughout those parts of Faithfull House used by the residents (individual residents' rooms and common parts). LST radiators were installed in those bathrooms where previously there was no heating. In those parts of the building used exclusively by staff, "normal" surface temperature radiators, rather than LST radiators, were installed – the system required no modification to cope with this, since "normal" or LST radiators could be used interchangeably.

The LST radiators used in the heating system installed at Faithfull House were of the make "Stelrad LST 2". The manufacturers' brochure refers to the fact that the surface temperatures of normal radiators may be as high as 80°C, and that touching such hot surfaces for only a few seconds can cause thickness burns. It explains that the Stelrad LST 2 radiator has a maximum surface temperature of 43°C, making it appropriate for use where there are "the elderly, the very young, and the physically and mentally impaired" who "may not be able to react quickly enough to withdraw from contact with a 'burning' surface before it's too late". It identifies, additionally, "schools, leisure centres, restaurants and all public access areas" as "safety-critical environments" where it might be appropriate to install the radiators. The brochure is illustrated with Stelrad LST 2 radiators installed in an elderly person's home, a nursing home and a child's room.

The brochure also refers to the complete nature of the Stelrad LST 2 radiators, in the following terms: "The pre-assembled "package" allows for a simple installation technique which gives significant savings in time and cost." At Faithfull House the radiators were installed as purchased, without adaptation – all that was required was that the outer casings were removed for the radiators to be connected to the pipes and then replaced.

The pipework installed for the new heating system comprised standard steel and copper tubing, and sections of pipework were fabricated (that is, cut to length, joined, or bent) both off-site and on-site, depending upon the circumstances. Any "difficult" work (such as shaping the tubing for an unusual angle in the course of routing the pipework) was carried out off-site. The design of the heating system provided for as much of the pipework as possible to be routed under floors or otherwise out of reach and touch, and where it was exposed it was then boxed in on-site with standard medium dense fibreboard.

The existing four boilers used to heat the water for the heating system were retained (it is not clear whether any of these boilers related to the hot water system, which it appears was operated separately from the heating system). An additional boiler was installed. New primary heating and circulation pumps, valves, header tanks, pressurisation units, control panels and flues were installed, and all, or substantially all, of the pipework in the boiler room was replaced.

The statutory provisions and cases cited in argument

Certain taxable supplies are zero-rated under the provisions of Section 30 VATA:-

(1) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section –

(a) no VAT shall be charged on the supply; but

(b) it shall in all other respects be treated as a taxable supply;

and accordingly the rate at which VAT is treated as charged on the supply shall be nil.

(2) A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for the time being specified in Schedule 8 or the supply is of a description for the time being so specified.

Group 12 of Schedule 8 VATA, headed "Drugs, Medicines, Aids for the Handicapped, Etc" includes the following items which are relevant to this appeal:

Item 2 The supply to a handicapped person for domestic or his personal use, or to a charity for making available to handicapped persons by sale or otherwise, for domestic or their personal use, of –

…

(g) equipment and appliances not included in paragraphs (a) to (f) above designed solely for use by a handicapped person;

(h) parts and accessories designed solely for use in or with goods described in paragraphs (a) to (g) above;…

Item 4 The supply to a charity of services of adapting goods to suit the condition of a handicapped person to whom the goods are to be made available, by sale or otherwise, by the charity.

Item 6 The supply of goods in connection with a supply described in item…4….

Item 7 The supply to a handicapped person or to a charity of services necessarily performed in the installation of equipment or appliances (including parts and accessories thereof) specified in item 2 and supplied as described in that item.

Item 11 The supply to a charity of a service of providing, extending or adapting a bathroom, washroom or lavatory for use by handicapped persons –

(a) in residential accommodation, or

(b) …

where such provision, extension or adaptation is necessary by reason of the condition of the handicapped persons.

Item 13 The supply of goods in connection with a supply described in item…11.

Note (3) to Group 12 provides:-

"Handicapped" means chronically sick or disabled.

Note (5J) to Group 12 provides:-

(5J)For the purposes of item 11 "residential accommodation" means –

(a) a residential home, or

(b) self-contained living accommodation,

provided as a residence (whether on a permanent or temporary basis or both) for handicapped persons, but does not include an inn, hotel, boarding house or similar establishment or accommodation in any such type of establishment.

Thus Item 2 (g) and (h) (which relates to goods) is linked with Item 7 (services of installing Item 2 goods); Item 4 (supply of services of adapting goods) is linked with Item 6 (the supply of goods in connection with the supply of services of adapting goods); and Item 11 (supply of services of providing, extending or adapting a bathroom etc) is linked with Item 13 (the supply of goods in connection with the supply of services of providing etc a bathroom etc).

In the course of their submissions, counsel for the respective parties made reference to the following cases: The David Lewis Centre (VAT 10860); CCE v David Lewis Centre [1995] STC 485; Foxer Industries (VAT 13817); Arthritis Care (VAT 13974); CCE v Help the Aged [1997] STC 406; Boys' and Girls' Welfare Society (VAT 15274); Joulesave Emes Limited (VAT 17115); and Vassall Centre Trust (VAT 17891).

The Appellant's submissions

Mr Vallat appearing for the Appellant made three principal, and alternative, submissions.

His primary submission was that the heating system installed at Faithfull House should be viewed as a single entity, and that the supply of that system falls within Items 2(g) and (h) and 7 of Group 12 of Schedule 8 VATA, on the grounds that it is the supply to a charity for making available to handicapped persons for domestic or their personal use of equipment and appliances (namely the heating system) designed solely for use by handicapped persons, and of services necessarily performed in the installation of that equipment and appliances.

If he failed in that primary submission, then he submitted that the supply made to the Appellant should be treated as falling within Items 4 and 6 of Group 12, being the supply to a charity of services of adapting goods (namely the heating system) to suit the condition of handicapped people to whom the goods are made available by the charity, and the supply of goods in connection with that supply of services.

His third submission was the narrower point, which would require an apportionment of the costs of the supply, that where the work on the heating system carried out at Faithfull House related to the bathrooms, washrooms and lavatories, the supply to the Appellant falls within Items 11 and 13, being the supply to a charity of a service of adapting bathrooms, washrooms or lavatories for use by handicapped persons in residential accommodation where such adaptation is necessary by reason of the condition of the handicapped persons, and the supply of goods in connection with that supply of services.

Mr Vallat accepted that, as a preliminary matter, he had to establish that all or some of the residents of Faithfull House are "handicapped" – if none were so, all his submissions failed. His case was that some – perhaps the majority – of residents are "handicapped". He referred to Note (3) to Group 12, which defines "handicapped" to mean "chronically sick or disabled" (his view, with which Mr McKay agreed for the Commissioners, was that "chronically" qualifies "sick" only, and not "disabled"). He also referred to the following passage in the tribunal decision in Help the Aged (VAT 14180) cited with approval in the judgement in CCE v Help the Aged [1997] STC 406 at p 411:

"Just because a person is elderly does not mean that he or she is disabled. But where the physical condition of the person in question is so impaired on account of old age or as the result of a chronic condition that he or she cannot get about without a wheelchair or a walking aid, then he or she can in the ordinary and accepted sense of the term be said to be disabled."