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Families for Children v Customs and Excise [2005] UKVAT V18937 (14 February 2005)

18937

EXEMPT SUPPLIES – Welfare services – Independent profit-making foster agency – Supplies to local authorities – Whether supply of welfare services – Yes – VAT Act 1994 Schedule 9 Group item 9 – Whether supplied by "organization recognized as charitable" by the laws of the UK – EC Sixth Directive Art 13.1(g) and (h) – Matter adjourned pending outcome of reference in Kingscrest Associates Ltd

LONDON TRIBUNAL CENTRE

FAMILIES FOR CHILDREN Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

RACHEL ADAMS FCA

Sitting in public in London on 29 and 30 November and 1 December 2004

B J Rice of B J Rice & Associates, chartered tax advisers and accountants, for the Appellant

Raymond Hill, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005

PRELIMINARY DECISION

The Appellant, Families for Children ("FFC") is an independent fostering organization. It appeals against a ruling in a letter from the Commissioners dated 1 April 2003. The decision is that, from 31 January 2003, welfare services provided by state-regulated private welfare agencies, including commercial independent fostering agencies, are making exempt supplies for VAT purposes. The decision, directed at FFC's supplies, goes on to state that, if FFC wishes to remain registered, it will have to demonstrate that it makes or intends to make taxable supplies in addition to exempt welfare services.

FFC have appealed against the ruling. Both parties have invited us to produce a decision on the ruling so far as it relates to the operations of FFC. FFC, represented by Mr B J Rice, contends that the Statutory Instruments upon which the ruling is based are ultra vires. They contend that they are in any event not an "agency" within the scope of the decision. Moreover, they say, the domestic legislation is incompatible with the EC Sixth Directive. They rely on Articles 13A.1(g) and (h) which, properly construed, do not apply to FFC whose services are neither closely linked to welfare work and/or the protection of children and young persons nor are they provided by an organization recognized as charitable by the UK; on that basis the supplies are not exempt. FFC go on to say that, in any event and as a matter of fact, they make multiply supplies which are to be taxed separately and some of those are standard rated. They ask us to refer the matter forthwith to the European Court of Justice for a preliminary ruling.

The VAT Tribunal, in the appeal of Kingscrest Associated Ltd has already referred to the ECJ the questions as to whether it is permissible to resort to other language versions of the Sixth Directive to elucidate the meaning of the word "charitable" in Article 13A.1(g) and (h) and whether those two paragraphs, properly interpreted, apply to a profit making entity. That issue arises in the present case. Both sides agree that FFC, as a profit making undertaking, cannot rank as a charity under the laws of the UK. We have therefore decided to defer reaching a final decision until the Kingscrest reference has been determined. Hence this is a Preliminary Decision.

We heard two witnesses. Mr Dave Miller, a partner in FFC, explained the operation of the organization. Mr William P Wallace, an employee of the Commission for Social Care Inspectorate ("C-SCI"), was called by the Commissioners.

The relevant UK legislation

Prior to 21 March 2002, item 9 of Group 7 in Schedule 9 to the VAT Act 1994 exempted:

"The supply, otherwise than for profit, by a charity or public body of welfare services and of goods supplied in connection therewith".

Item 9 was then amended by way of The Value Added Tax (Health and Welfare) Order 2002 [SI 2002/762] ("the 2002 Order") with effect from 21 March 2002 to exempt:

"The supply by (a) a charity, (b) a state-regulated private welfare institution or (c) a public body, of welfare services and of goods supplied in connection with those welfare services".

It is relevant to mention two things at this stage. First, at the same time as introducing into item 9 an exemption for the supply of welfare services by a "state-regulated private welfare institution", the requirement that those services be made "otherwise than for a profit" was removed. Second, it is no part of the Commissioners' case that FFC is a public body; and, as already noted, the Commissioners accept that FFC is not a charity under the laws of the UK.

By section 96(9) of VAT Act 1994, the provisions of Group 7 are to be interpreted in accordance with the Notes to Group 7. "Welfare services" is defined in Note (6)(b) to Group 7 as including "services which are directly connected with … the care or protection of children or young persons". Note (8) defines "state-regulated", so far as is relevant, as meaning:

"… 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."

With effect from 1 January 2003 the Value Added Tax (Health and Welfare) Order 2003 [SI 2003/24] ("the 2003 Order") extended exemption to welfare services supplied by state-regulated private welfare agencies, including domiciliary care agencies, independent fostering agencies and voluntary adoption agencies, by adding the words "or agency" to item 9. Accordingly, item 9 now reads as follows:

"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".

The relevant EC legislation

Article 13A of the EC Sixth Directive covers "Exemptions for certain activities in the public interest". Article 13A.1 provides:

"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse:

…

(g) the supply of services and of goods closely linked to welfare and social security work, including those supplied by old people's homes, by bodies governed by public law or by other organizations recognized as charitable by the Member State concerned;

(h) the supply of services and of goods closely linked to the protection of children and young persons by bodies governed by public law or by other organizations recognized as charitable by the Member State concerned;

…"

FFC – short summary of activities

The term "FFC" covers a group registration embracing Families for Children (Self) Ltd and Families for Children LLP. The former is a limited company whose directors are Messrs Dave Miller, Steve Bailey and David Langley. The latter, a limited partnership, has three partners namely, Messrs Miller, Bailey and Langley. The limited partnership and the limited company have at all times been operating on a "for profit" basis.

FFC operates as an independent fostering service provider. It is registered with the National Care Standards Commission under the Care Standards Act 2000 following inspection by C-SCI. FFC is described in the Certificate of Registration as "Fostering Agencies". It engages carers. The "foster carer" provides the nucleus of the foster family. Each foster carer will, prior to engagement, have been checked and approved by FFC and, following engagements, will have been trained, supported and regularly reviewed by FFC.

FFC enters into "Foster Placement Contracts" with Local Authorities. Typically the local authority will have contacted the referrals officer of FFC to enquire whether FFC has a vacancy with a suitable foster carer. The local authority will already have FFC's tariff of charges and fees. FFC will approach one of its foster carers to secure the acceptance of the carer's agreement to take the child into the carer's foster family. The Foster Placement Contract contains the financial terms and conditions and the placement terms and conditions as between FFC and the local authority. Essentially, the local authority agrees to meet stipulated charges incurred by FFC and to pay fees to FFC; FFC agrees in return to undertake the supervision of the placement and to make contact with the child and foster carers, to comply with all statutory obligations, to provide the local authority with case notes and to enable a local authority and the child's parents to visit the child. (We will examine the Contract in more detail in paragraphs 21-26 below.)

FFC then issues a monthly invoice to the local authority for fees. Invoiced payments are, explained Mr Miller, the sole source of FFC's income. We were not told how FFC recovers the charges.

The regulatory framework

Section 11 of the Care Standards Act 2000 ("the 2000 Act") makes it an offence for anyone to carry on or manage, without being registered, "an establishment or agency of any description". Section 4(4) defines "Foster Agency" as –

"(a) an undertaking which consists of or includes discharging functions of Local Authorities in connection with the placing of children with foster parents; or

(b) a voluntary organization which places children with foster parents in section 59(1)".

It is not in dispute that all FFC's activities fall within paragraph (a). Section 22 of the 2000 Act empowers the appropriate Minister to make regulations in relation to establishments and agencies. For fostering agencies and their activities the regulations are contained in the Fostering Service Regulations 2002 (SI 2002/57) ("the Regulations"). "Registered person" is defined in regulation 2(7) of those regulations as the person who, in relation to the fostering agency, is the registered provider or registered manager of the agency; the "registered provider" is the person registered "as the person carrying on the fostering agency". FFC is registered as the "agency"; the registered providers are the three directors-partners and the registered person is Mr Miller.

By regulation 11(a) an independent fostering agency, such as FFC, is required to ensure that "the welfare of children placed or to be placed with foster parents is safeguarded and promoted at all times". Regulation 12 requires the fostering service provider to "prepare and implement a written policy which is intended to safeguard children placed with foster parents from abuse and neglect and which sets out the procedure to be followed in the event of any allegation of abuse or neglect. Regulation 13 requires the provider to prepare and implement a written policy on "acceptable measures of control, restraint and discipline of children placed with foster parents". The provider is required, by regulation 15, to promote the health and development of those children.

FFC, through Mr Miller, is required by regulation 19 to ensure a sufficient number of suitably qualified, competent and experienced persons working for the purposes of the fostering service. Where, as here, those persons are not employed by the fostering service provider (FFC), the provider must ensure they are of good character, fit, properly qualified and appropriately supervised : regulation 20.

Mr Miller explained that all the foster carers with whom FFC has engagements work only for FFC.

Approval of foster carers (referred to as foster parents in the regulations) is governed by Part IV of the Regulations. The fostering service provider is required to establish a "fostering panel" with an outside chairman and member comprising at least two social workers employed by the provider, the provider, a director and at least four other independent members including at least one established foster carer. The fostering panel's functions are to consider applications for approval of foster carers and to recommend the terms of approval. The provider has the personal responsibility of deciding whether to approve a person as a foster parent and to take into consideration the recommendations of the fostering panel : regulation 28. It is the fostering service provider's responsibility to assess potential foster carers (foster parents) and to carry out reviews : regulation 29.

Regulation 40 covers independent fostering agencies which, as here, discharge local authority functions imposed on the local authority by regulations 34-37 which cover placements of children. It enables those functions to be discharged by a registered person (such as FFC). Regulation 40(4) requires there to be a foster placement contract between local authority and the registered person.

The Foster Placement Contract

A standard form agreement provided by FFC is entered into between FFC and the local authority (the "Responsible Authority") making the particular placement. This is the sole source of the consideration received by FFC for the supplies to which this appeal relates. It is divided into two sections. Section One covers the "Financial Terms and Conditions". Section Two covers the "Placement Terms and Conditions".

The Placement Terms and Conditions

The Responsible Authority retains "case responsibility" unless delegated to FFC "within a specific agreement relating to an individual child". The foster placement contract is, we understand, such an agreement falling within regulation 40(1) of the Regulations.

FFC is required, among other things:

(i) to make case notes available to the Responsible Authority

(ii) to provide the Responsible Authority with information as specified in Schedule 3 to the Regulations about the prospective foster parent and other members of his household and family

(iii) "to undertake an annual review of the foster carers and to provide notices of suitability"

(iv) to undertake the supervision of the placement to which the Foster Placement Contract relates and to make contact with the child and foster carers

(v) to produce a written report on the Contract

(vi) to provide the Responsible Authority with a written agreement between FFC and the carer

(vii) to provide assistance, support and advice to the carers and to train them and to ensure that they comply with the terms of the Foster Placement Contract and

(viii) to review the child care plan at agreed intervals.

The Responsible Authority undertakes to provide FFC with the statement about the arrangements for the child and the objectives of the placement and other relevant details about the child. It is required to set out the arrangements for the financial support of the child during the placement. There is to be a statement provided by the Responsible Authority specifying, for example, the special health and safety and education needs of the child and the circumstances in which it is necessary to obtain in advance its approval for school trips and overnight stays away from the carer's home.

The Financial Terms and Conditions

FFC is to charge the Responsible Authority with, among other things, fostering payments made to foster carers, pocket money, a clothing allowance, normal travelling expenses, the costs of therapeutic assessments and programmes, of vocational/employment training schemes, respite care and holidays for carers, holding programmes for the children in care and casework support.

FFC earns, as consideration for services, a weekly fee for each placement. The fee is expressed in these terms in clauses 6 and 7 of the Financial Terms of the Foster Placement Contract:

"Fees to be £ per week. Where education is undertaken at the Families for Children Education Centre, an additional charge will apply of £

The daily fee for an alternative education/day care programme for children not in school will be pro-rata the education fee stated in paragraph 6 above. This fee will also apply to children who are excluded for a significant period of time."

We were provided with an invoice issued by FFC to London Borough of Bromley dated 4 November 2003 for "foster fees" for November 2003 in respect of a particular placement. The weekly rate is £866.28, making £3,712.50 for the month on which £649.99 of VAT has been charged. This appeal is concerned with the services for which those fees are the consideration.

FFC's contract with its foster carer

Clause 3(ii) of FFC's standard foster carer agreement with carers contains an undertaking by the carer that –

"I/We will care for any children placed with me/us as an equal and valued member of my/our family and will safeguard and promote the child's welfare".

Mr Miller explained that the foster carer agrees to work "in partnership with" FFC to provide a place in the family for the child to live. FFC provides its foster carers with a "Foster Care Handbook" to which we refer later. Families for Children has the right to carry out inspections of the foster carer's facilities which it does through its own social workers or care supervisors. The standards demanded by FFC of its foster carers are, explained Mr Miller, the UK National Standards : these are more exacting than the minimum standards referred to below.

Other facilities

Each child placed by FFC with a foster carer is provided with the use of computer by FFC.

FFC runs a therapeutic service for which it employs a therapist. FFC has a holiday scheme by which it provides young persons in the care of its foster carers with holidays and the carers with breaks. All these facilities are, as noted in the Foster Placement Contract, charged separately on the local authority.

The role of C-SCI

We heard evidence from Mr William Wallace, the manager of C-SCI with responsibility for regulation for the Thanet area of Kent. The role of C-SCI, he said, is to inspect registered agencies annually to ensure that they are meeting requirements and national minimum standards, to advise where appropriate, to assist in improving the quality of care and safeguarding of children and to take steps to enforce, where necessary, to ensure compliance with those standards. C-SCI is not involved directly in the supervision of foster carers; instead it ensures that they are properly recruited, supported, vetted, trained and reviewed by the fostering agency. Each time a foster carer changes to a different agency, he is put through the vetting, training and reviewing procedures by the new agency; it is C-SCI's responsibility to ensure that that is done.

The great majority of independent fostering agencies recruit their carers in the manner that FFC does and consequently require to be registered. There were sixteen fostering agencies in the four areas covered by Mr Wallace's office. They had to be registered under section 11 of the 2000 Act because they discharged functions of local authorities in placing children with foster parents. Mr Wallace was aware of one agent in those areas who acted as an intermediary; that agent introduced potential carers to fostering agencies. That agent's undertaking did not fall within the definition of fostering agency in section 4(4) of the 2000 Act : it did not, therefore, have to be registered with C-SCI.

The national minimum standards

These are issued by the Secretary of State and are applicable both to local authority fostering agencies and to independent fostering agencies. They must be taken into account by C-SCI when making its decisions and, in particular, will be taken into account by C-SCI in its decisions regarding registration, the imposition of conditions for registration, variation of any conditions, cancellation of registration and enforcement. Standard 8 states, among other things, that "For agencies providing foster carers to local authorities, those agencies ensure that they offer carers only if they represent appropriate matches for the child to whom a local authority is seeking care" and Standard 9 states that "The fostering service protects each child or young person from all forms of abuse, neglect, exploitation and deprivation".

Mr Miller accepted that that Standard covered both the fostering agency and the local authority. It follows that both local authority and FFC have the responsibility to protect the child. They work together (although only a local authority can take children into care).

The Foster Care Handbook

Part 13 of the Handbook sets out FFC's procedure for assessment and approval of foster carers. The application procedure involves FFC carrying out checks with the police and other agencies, taking up references with personal and employment referees and holding assessment meetings. In Part 13 page 8 it is stated that –

"Children and young people who are looked after by foster carers are very vulnerable. We have to make sure that the people who look after them will keep them safe."

Among the competences which FFC requires from prospective foster carers are "to provide a safe and caring environment, by ensuring that the children are cared for in a home where they are safe from harm and abuse" and "helping children keep themselves safe from harm or abuse, and to know how to seek help if their safety is threatened" (see Chapter 13 page 5).

Part 6 of the Handbook deals with the provision of a safe environment for foster children. It informs foster carers that the foster home will be inspected annually and that FFC expects all foster carers to meet high standards of health, safety and hygiene and, if the carer is in doubt as to what is reasonable care, to ask the advice of their case worker appointed by FFC or the child's social worker. Part 14 of the Handbook gives advice to foster carers about their supervision and support by a case worker, who is employed by FFC. It explains that a case worker will visit foster carers on a monthly basis for the duration of the child's placement with that foster carer and that there will be at least one unannounced visit per year. This is in addition to visits made by the child's social worker, employed by the relevant local authority. FFC's case workers have to ensure that foster carers are meeting the child's emotional and physical needs and are providing the child or young person with a safe home.

The service provided by FFC

FFC's brochure "Families for Children – The Fostering Experts" says of its fostering services –

"Every child is unique. Through our broad range of carer skills and the expertise of our staff, we can meet the specific needs of each individual. From the moment children are placed with us until well beyond the end of their care, we provide the supportive background they deserve."

Children placed for fostering include those whose natural home lives have been disrupted by, for example, marriage break-up, children who are less physically able and children from other countries who arrive as unaccompanied asylum seekers. Many children placed by FFC are, as already noted, in need of psychotherapy. Some will have been hurt or abused; some were in need of protection from themselves. Mr Miller explained that sometimes the children referred by the local authority for placing were "relatively non-difficult" but more frequently children were "difficult".

THE ISSUES AND CONCLUSIONS

The ultra vires issue

FFC challenged the vires of the 2002 and 2003 Orders. Both had been brought into effect by the purported exercise by the Treasury of its powers in section 31(2) of VAT Act 1994. That subsection, which enables the Treasury to vary the supply of any description by adding or deleting from those qualifying for exemption does not, FFC argue in a written submission, "enable the Treasury to convey except on a particular body or to exclude a particular body as qualifying for exemption". The Statutory Instruments do in fact add to the list of bodies qualifying for exemption and as this is claimed to be under section 31 "it is ultra vires".

We do not accept FFC's challenge, essentially for the reasons advanced by the Commissioners. Looking at the empowering section, section 31(2), in isolation we read it as giving the Treasury power to vary Schedule 9 by adding to, deleting or varying "any description of supply". One of the ways of describing a supply is to describe the relevant supplier and this method of description is used throughout Schedule 9 as part of the description of relevant exempt supplies. For example, Schedule 9, Group 3, item 1 exempts "the conveyance of postal packets by the Post Office company", whilst Schedule 9, Group 6, item 1 restricts the education exemption to its provision "by an eligible body", which term is further defined in Note 1.

Although not strictly an ultra vires matter, FFC's argument can also be interpreted as saying that the UK has acted in a manner that is incompatible with Article 13A.1 by purporting to add "agencies", by means of the 2003 Order, to the exemption provided for by Article 13A.1(g) in respect of "bodies governed by public law or by organizations recognized as charitable by the Member State concerned". That, we think, is misconceived. The words "institution" and "agency" used in the amended Schedule 9, Group 7, item 9 are not inconsistent with paragraphs (g) and (h) of Article 13A.1. State-regulated private welfare "institutions" and "agencies" are simply types of "body" governed by public law or "organization" recognized as charitable. It will be seen from the opinion of the Advocate General in Gregg [1999] STC 934, at paragraphs 9, 10 and 13, that the terms used in Article 13A were chosen so as to cover the factual situation in different Member States and are capable of covering a number of different legal forms. The Court agreed at paragraphs 15-18. It follows that the expressions "body" and "organization" in Article 13A.1 are wide enough to embrace "institutions" and "agencies" in the amended Schedule 9, Group 7, item 9.

The "Agency" issue

Item 9 as amended by the 2003 Order requires the supply to be by a charity, by a state-regulated private welfare institution or agency or by a public body. We will refer later to the question whether FFC is a "charity". We have already noted that there is no issue about whether it is an "institution" : the Commissioners accepted that it is not. Moreover the Commissioners accepted that FFC is not a "public body". The only issue at this stage is whether FFC is an "agency".

The arguments for FFC as set out in their written submission run as follows : they say that

"… there is no evidence that FFC is an agency in the general meaning of the term nor is there any evidence that it is an agency within the meaning of the Care Act 2000".

FFC go on to argue in an amended Notice of Appeal that the word "agency" is not defined in item 9 "and so the normal meaning of the word should be taken". It takes this from Halsbury's Laws to be "a person employed for the purpose of placing the principal in contractual or other relations with a third party". FFC then argue that it is not an "agency" such that its services fall within the scope of the 2003 Order because it does not act on behalf of local authorities in placing children, but acts as principal in contracting with local authorities to provide family care for children and that it contracts separately and on its own behalf with prospective foster carers for them to provide foster care services to it.

FFC makes its supplies as principals. These are made to the local authorities in return for the consideration. That the services are not provided by FFC as agent is common ground. The question for us is whether the maker of the 2003 Order meant the word "agency", found in the expression "state-regulated private welfare agency", to connote an agent within the English law of contract. We think not.

If the maker of the 2003 Order had wanted to limit the scope of item 9 to "agents" which, for reasons we shall give, seems most unlikely, the word agent would have been used.

The word "agency" in the present context takes its colour from the phrase "state-regulated private welfare agency". "State-regulated" is defined in Note (8) as meaning approved, licensed or registered by any Minister or authority pursuant to a provision of a public general Act. Registration of fostering agencies is governed by sections 11 to 21 of the 2000 Act. Under section 4(4)(a) of that Act, the definition of "fostering agency" includes:

"An undertaking which consists of or includes discharging functions of local authorities in connection with the placing of children with foster parents".

Under section 4(4)(b) of the Act, "fostering agency" also includes a voluntary organization which places children with foster parents. It follows therefore that the definition covers both organizations which place children with foster parents in their own right (under section 4(4)(b)) and organizations which make placements under powers delegated to them by local authorities (under section 4(4)(a)).

FFC falls within section 4(4)(a). FFC admits this in their written submissions saying –

"It is true that the local authorities call on the services of FFC to provide the services that would ordinarily fall on the local authority; the accommodating of children in the care of the local authority".

Indeed FFC describes itself as an "Independent Fostering Agency" in its standard Foster Care Agreement with foster carers and on the introductory page of its Foster Care Handbook.

If FFC were right and the words "or agency" in Group 7, item 9 referred only to those organizations which identified potential foster carers for local authorities and then made an introduction enabling the local authority to contract directly with the foster carers concerned, it is difficult to see what legislative purpose this would achieve. There can be no reason why Parliament would specifically wish to exempt as a sub-group those fostering agencies registered under section 4(4) of the 2000 Act who act as intermediaries or "agents" in the contractual sense of the word. Indeed the only such intermediary we heard of was that identified by Mr Wallace; and because that intermediary did not place children with foster parents, there was no need for it to be a registered agency. Furthermore it is difficult to see that an exemption so formulated would comply with European law in that, as explained below, the authority for Group 7 item 9 is paragraphs (g) and (h) of Article 13A.1 which requires the UK to exempt the supplies of services and goods closely linked to welfare and social security work and closely linked to the protection of children and young persons by organizations "recognized as charitable by the Member State concerned". In case C-415/04 Stichting Kinderopvang Enschede, reference dated 24 September 2004, the Dutch Supreme Court has referred the case to the ECJ relating to a non-profit making child-care foundation which self-provides for the supervision of children under school age and also acts as an intermediary in arranging for the supervision of children by a pool of host parents. In that case, it is common ground that the services of the foundation that consist in actual child care are exempt under Article 13A.1(g). The dispute is as to whether the intermediary activities are also exempt. In those circumstances, the Dutch Supreme Court has referred the following question to the ECJ:

"Must Article 13A.1(g), (h) and (i) of the Sixth Directive be construed as meaning that the service provided … consisting in intermediary activities in connection with the care of children under school age and of school children outside of school hours in the homes of host parents, falls to be regarded as a service covered by one or more of those provisions?"

It appears therefore that, in so far as Articles 13A.1(g) and (h) are intended to make any distinction between service providers who act as intermediaries and those who act as principals, the only question is whether those who act as intermediaries are covered by Article 13A.1(g) and (h) and not whether those who act as principals are.

The compatibility of the 2002 and the 2003 Orders

FFC argues in the alternative that the 2002 Order and the 2003 Order are incompatible (or "ultra vires" to use FFC's term) with the Sixth Directive and therefore the ruling given by the Commissioners in reliance on those Orders that FFC's supplies were exempt was unlawful. In particular FFC argues that the 2002 Order and the 2003 Order are not justified by either paragraphs (g) or (h) of Article 13A.1. In response the Commissioners contend that both Orders are fully justified by paragraphs (g) and (h).

FFC's argument starts with the contention that the decision of the ECJ in "SUFA" [1989] ECR 1737 requires that exemptions within Article 13 are to be interpreted strictly since they constitute exemptions to the general principle that turnover tax is levied on all services supplied for a consideration by a taxable person. The Commissioners' respond to this by drawing attention to later decisions of the ECJ. Those indicate that SUFA does not require that the strictest possible interpretation is always to be preferred. In European Commission v France [2001] ECR 1-239, the French Government tried to rely on SUFA to argue that the transmission of medical supplies for analysis was taxable even though the sample-taking and analysis themselves were exempt. The Court rejected this at paragraphs 21-24 on the basis that the exemption in question did "not … call for an especially narrow interpretation" and had regard instead to the purpose of the exemption.

FFC then argue that the term "care" when used in Note (6) to Group 7 of Schedule 9 means medical care and does not cover general care. Thus only medical care and protection of children and young persons qualify for exemption. The trouble with that argument, which was based on an explanation of the history of the earlier law, is that Note (6) is the current definition provision for "welfare services" as used in item 9 of Group 7. Medical care is exempted in specific terms elsewhere in Group 7. It is exempted under item 4 if carried out in a hospital or state-regulated institution and under items 1-3 if carried out by a health professional otherwise. Note (6) by contrast, says nothing about medical care and cannot by implication be regarded as being confined to medical care.

It is relevant to mention in relation to that argument of FFC that in Ambulanter Pflegedienst Kügler [Case C-141/00] [2004] 3 CMLR 54, the ECJ indicated at paragraph 44 that "the provision of general care and domestic help by an out-patient care service for those in a state of physical or economic dependence, as the persons to whom Kügler supplied services were in principle linked to social assistance, so that it falls within the concept of "services closely linked to welfare and social security work", referred to in Article 13A.1(g) of the Sixth Directive. We note also that FFC accepts in its skeleton argument that "It is true that the services of FFC are directly connected with the care of children and young persons". At a later stage FFC states –

"It provides general care for children and that is an end in itself".

For all those reasons we cannot accept FFC's argument that the terms care as used in Note 6 is aimed at medical care.

We move on now to examine the actual question of whether in terms of paragraphs (g) and (h) of Article 13A.1 the services supplied by FFC are "closely linked to welfare and social security work" and/or "closely linked to the protection of children and young persons". The case for the Commissioners is that the services supplied by FFC are "closely linked" to welfare and social security work or to the protection of children and young persons. In International Bible Students' Association [1988] STC 412, Nolan J held at 415d-g that the words "closely linked" used in Article 13A.1(g) encompassed supplies which were "incidental" or "ancillary" to welfare services. On that basis he held that the exemption contained in Article 13A.1(g) applied to the supply of catering at a religious convention which was incidental to the spiritual welfare work of the convention. It was not necessary for the catering to be found to promote, further or foster the spiritual welfare work of the convention in order to qualify for exemption. It follows that FFC's services will be closely linked even if it provides an incidental or ancillary service.

FFC, as we understand their arguments, make two broad points on this aspect of the case; they argue that the words "welfare" and "protection" have narrow meanings and FFC argue that any "welfare" or "protection" of children and young persons is carried out by the relevant local authority and not by FFC.

We therefore have to determine who carries out any relevant "welfare" or "protection". FFC, in their written submissions, argue that –

"… the children and young persons are in need of protection but FFC do not protect children and young persons … because services and goods supplied are a consequence of the act of protecting the child, the act of protecting itself being the taking into charge by the local authority".

FFC expand on this argument in later written submissions and they say that the principle activity of FFC is "the general care of children" and that –

"If the person whose duty it is to protect children and young persons and to make the provision for welfare and social security chooses to buy in services to enable those duties to be discharged, it does not entitle the provider of those services to claim exemption".

To the extent that FFC are denying that they have duties with regard to the welfare and protection of young persons, they must be wrong. The summary of facts set out above makes it clear that FFC have a statutory duty to protect and promote the welfare of children whose placements they arrange. We refer to a few salient points in this regard. Regulation 11 of the Regulations directs that the registered person in respect of an independent fostering agency, such as FFC, is required to ensure the welfare of children placed or to be placed with foster parents is safeguarded and promoted at all times. Regulation 12 requires the fostering service provider to prepare and implement a written policy which is intended to safeguard children placed with foster parents from abuse and neglect. The National Minimum standards for Fostering Services pursuant to section 23 of the 2000 Act are applicable to independent fostering agencies and are to be taken into account by C-SCI when making its decisions and, in particular, will be taken into account by C-SCI in decisions regarding registration, the imposition of conditions for registration, variation of any conditions, cancellation of registration and an enforcement. Standard 8 states among other things that "For agencies providing foster carers to local authorities, those agencies ensure that they offer carers only if they represent appropriate matches for a child for whom a local authority is seeking care" and Standard 9 states that "The fostering service protect each child or young person from all forms of abuse, neglect, exploitation and deprivation,

Furthermore, FFC's own Foster Care Handbook sees its role as including the protection of children. It deals with the provision of a safe environment for the foster children. It gives advice to foster carers about supervision and support and confirms that FFC's case workers have to ensure that foster carers are meeting the child's emotional and physical needs and are providing the child or young person with a safe home. Each Foster Placement Contract between FFC and the local authority contains an undertaking by FFC to review approval of the foster carers at least once a year. The terms of the Foster Care Agreement between FFC and the foster carer requires the carer to care for the children placed through FFC.

Subject to the point to which we now turn of whether FFC's supplies are of (or closely linked to) "welfare" or "protection" services, we are not, so far, persuaded by FFC's arguments. FFC, as already noted, argue that those are to be given a narrow meaning. We have already rejected that.

What meaning do FFC give to the words "welfare" and "protection"?

FFC, in one of its written submissions, argues that –

"The protection of children and young persons … is protection from actual or perceived threat recognized as such by the Courts".

It goes on to argue that "the term welfare does not mean that it covers all services that provide an advantage or a benefit to the recipient. Welfare in this sense is the minimum state of well-being that society thinks people should enjoy and social service work is the achievement through effort of that standard". FFC then argue that –

"The provision of services closely linked to welfare and social security work means the supply of services linked to welfare and social security work because of the need of the recipient caused by ill-health or financial impoverishment".

FFC conclude by saying –

"Given that the children are not in need of physical or mental care nor are they under threat, the services cannot be closely linked to welfare and social security work or closely linked to the protection of children and young persons".

We can find no authority for giving the words "protection" and "welfare" the limited meaning ascribed to them by FFC. In the first place, those words have a Community law meaning applicable across the Community and must be construed in a purposive manner. We can not see why the Community legislature should have legislated simply to exempt services relating to "protection from an actual perceived threat as recognized by the Courts" rather than protection of children from deprivation or poor social conditions more generally. Indeed Article 13A is headed "Exemptions for certain activities in the public interest"; why the Community legislature would regard one form of protection of children and young persons as more in the public interest than the other is hard to see. The Community legislature is unlikely to have tied the exemption to protection from threats recognized by national child protection legislation; that legislation will differ from Member State to Member State. It is therefore highly unlikely that the legislature would have given protection such a narrow meaning tied to national or legal concept.

In any event, even if FFC's narrow interpretation of the word "protection" were right, the services provided by an independent fostering agency would fall within that definition. We think that, although the services of an independent fostering agency such as FFC are more to do with care, there is nonetheless a sufficient element of protection to characterize those services as the protection of children and young persons. We have already drawn attention (in paragraph 16 above) to Regulation 12 of the 2002 Regulations which imposes a duty on the registered person of the fostering agency to make arrangements for the protection of the fostered children, including protection against abuse or neglect, which are threats recognized by the UK courts. Moreover the facts show that children and young persons are frequently in care because care provides them with protection; see, e.g, paragraph 36 above.

The restricted meaning given by FFC to the word "welfare" is directly contrary to authority. In Yoga for Health [1994] STC 630, Nolan J held that it was not confined to services "essentially concerned with the provision of economic relief for material benefit" but encompassed "generally being well" and included "the state of mental and physical well-being" which the taxpayers in that case, who ran a centre for the study and practice of Yoga, sought to promote. It also included "the provision of encouragement and moral support".

In arguing that "welfare" has a restricted meaning, FFC appears to rely on paragraph 44 of the judgment of the ECJ in the Kügler case (referred to above). Paragraphs 42-44 of the judgment of the Court read as follows:

"42. By its third question, the national court essentially seeks to ascertain whether the provision of general care and domestic help by an out-patient care service to persons with a state of physical or economic dependence amounts to the supply of services closely linked to welfare and social security work within the meaning of Article 13A.1(g) of the Sixth Directive and, if so, whether Article 13A.1(g) may be relied upon by an individual.

As regards the first part of this question, all the parties which submitted observations on the point take the view that general care and domestic help provided by an out-patient care service fall within Article 13A.1(g).

In this connection it need only be stated that it is clear from the terms in which Article 13A.1 of the Sixth Directive is couched that, while the provision of care of a therapeutic nature is exempt by virtue of Article 13A.1(c), the provision of general care and domestic help by an out-patient care service to those in a state of physical or economic dependence, as the persons to whom Kügler supplied services were, is in principle linked to social assistance, so that it falls within the concept of "services closely linked to welfare and social security work" referred to in Article 13A.1(g) of the Sixth Directive".

It will be seen from that passage that the court does not say that the concept of services closely linked to "welfare" in paragraph (g) is limited to the provision of general care to those in a state of physical or economic dependence. What the court was doing was responding to the factual scenario by the national court, which was whether Article 13A.1(g) included the provision of general care to persons in a state of physical or economic dependence.

Is FFC an organization "recognized as charitable by the Member State concerned"?

The Commissioners contend that it is. FFC disputes this. We will not extend this decision, at this stage, by dealing with this point. The issue has, as noted at the start of this Decision, already been referred to the ECJ in the Kingscrest Associates reference. It would not be appropriate for us to anticipate the ECJ by deciding the matter.

The Card Protection Plan argument

FFC rely on the decision of the ECJ in Card Protection Plan v Commissioners of Customs and Excise [1999] STC 271 as authority for two separate arguments.

First, they say, Card Protection Plan leads to the conclusion that FFC's services were not "closely linked" to welfare or to the protection of children and young persons for purposes of Article 13A.1(g) and (h). FFC's supplies are, on the Card Protection Plan argument, to be regarded as economically dissociated from any care and protection supplies and therefore to be charged to VAT as separate and independent supplies. To the extent that International Bible Students Association v Commissioners of Customs and Excise, referred to above, says otherwise, it is no longer good law.

Second, argue FFC, the Card Protection Plan decision enables it to identify certain supplies which are to be regarded as economically dissociable and so independent for VAT purposes. The supplies so identified are to be charged as separate supplies in their own right and according to their own description.

In Card Protection Plan, the ECJ held, at 293, that in deciding whether a transaction which comprises several elements is to be regarded as a single supply or is two or more distinct supplies to be assessed separately, regard must be had to all the circumstances in which the transaction takes place, taking into account –

"29. … first, that it follows from Article 2.1 of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical customer, with several distinct principal services or with a single service.

We do not see the Card Protection Plan decision as applying to the question whether a supply is "closely related" to one of the exempt supplies. That case deals with the issue how to treat a bundle of supplies which, if supplied individually, would have different tax treatment. The issue here under Article 13A.1(g) is whether the supplies made by FFC are closely linked, not to other supplies made by it, but to welfare, social security and the protection of children and young persons. The French Government tried to make the same argument as made by FFC in Case C-76/99 European Commission v France at paragraphs 19 and 25. At paragraph 29, the Court simply said that "the fact that, according to the French Government, the transmission of the sample constitutes a distinct act does not preclude it from being regarded as closely related to the analysis for the purposes of the Sixth Directive". In any event, even if Card Protection Plan did apply, since the exemptions contained in Article 13A.1(g) and (h) cover general care as part of welfare (and protection), there is no need to decide whether any of FFC's services are distinct taxable services.

Turning to FFC's second argument based on Card Protection Plan, we agree that if any of its services are economically dissociable from the core supply of independent fostering agency services to local authorities, then those separate supplies are to be taxed according to their separate VAT characteristics. FFC say they supply computers and those are separate supplies of goods. Mr Miller said in evidence that every child whom FFC placed was supplied with a computer. See paragraph 28 above. That is all we know. There is nothing in the Foster Placement Contract or in any other documents that we have seen that deals with computers. We do not know whether the supplies are outright transfers of ownership to the child once the placement starts or leases under which the local authority pays rent. We do not know whether the supply is to the local authority or to the foster carer or to the child. In the absence of any better evidence we cannot conclude that FFC makes separate and independent supplies of computers.

FFC, as noted in paragraph 29 above, runs a therapeutic service for which it employs a therapist. The Financial Terms and Conditions of FFC's standard Foster Placement Contract provide that charges for initial therapeutic assessments and for subsequent therapy programmes are to be made on the local authority. These may, depending on the full facts of which we are not yet aware, rank as separate supplies for a separate consideration. They may be exempt or they may be standard rated. We cannot rule on this.

FFC has its own holiday scheme : see paragraph 29 above. Here again the Foster Placement Contract with the local authority provides for FFC to make separate charges on the local authority for use of these facilities. The supplies also may rank as separate supply from FFC's supplies of foster placement services. All depends on the facts which FFC did not put before us.

The Article 13A.2(b) argument

Article 13A.2(b) provides that the supply of goods and services shall not be provided for in paragraphs (b), (g), (h), (i), (l), (m) and (n) of Article 13A.1 if "it is not essential to the transactions exempted". FFC say that it is not essential to exempt care and protection supplies to local authorities. This is because local authorities have the right to reimbursement of the VAT they suffer on standard rated supplies used by the local authority otherwise than for the purposes of a business : see section 33 of VAT Act 1994. Until the 2002 and 2003 Orders, FFC's supplies to local authorities were standard rated and used by the local authorities for purposes of their non-business statutory functions. Because the local authorities could recover that VAT, it was not essential to exempt the services on which that VAT would otherwise have been borne.

The fallacy in that argument is that Article 13A.2(b) is confined in its application to cases where exemption is not essential to the transactions exempted, being transactions falling within Article 13A.1. The transactions exempted by paragraphs (b), (g), (h), (i), (l), (m) and (n) of Article 13A.1 are supplies closely related or closely linked to particular activities of a public interest nature. A purported exemption conferred by a Member State which relates to something that is not closely linked or closely related will be caught by the embargo in Article 13A.2(b). The point was dealt with in Customs and Excise Commissioners v Pilgrims Language Courses [1998] STC 784. In that case Richards J said, at 802j:

"The purpose of Article 13A.2(b) is plainly to ensure that the exemptions are kept within the strict limits set by the relevant provisions of Article 13A.1; it prevents Member States from extending the exemptions to supplies that are not essential to the "transactions" identified in Article 13A.1."

The decision of Richards J was reversed on other grounds by the Court of Appeal at [1999] STC 874. But the above passage remains good law. The use of the expression in Article 13A.2(b) "essential to the transactions exempted" shows that it is not relevant whether the exemption of the transactions was essential to the recipient of the supplies in question. Thus the position of the local authorities in the present circumstances are beside the point.

It follows from what we have said so far that FFC makes the relevant supplies as a state-regulated private welfare agency and that the relevant supplies are of welfare services within Note (6)(b) to Group 7. In terms of paragraphs (g) and (h) of Article 13A.1 we are satisfied that the relevant supplies are of services "closely linked to welfare … work" and "closely linked to the protection of children and young persons".

That brings us to the end of this Preliminary Decision. If the ECJ in the Kingscrest reference rules that the expression "organizations recognized as charitable by the Member State concerned" has no application to organizations, such as FFC, carrying on business for profit, it will be necessary to complete this decision with that ruling in mind. If that situation occurs, the parties have the right, within six months of the release of the decision of the ECJ, to ask for a further hearing on that point.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 14 February 2005

LON/02/559