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Families for Children (No.2) v Revenue & Customs [2006] UKVAT V19857 (31 October 2006)

19857

EXEMPTION – Health and welfare – Protection of children and young persons – Independent fostering organization – Operated for profit – Whether covered by decision of ECJ in Kingscrest Associates Ltd [2005] STC 1547 – Yes – Appeal dismissed

LONDON TRIBUNAL CENTRE

FAMILIES FOR CHILDREN Appellant

(No.2)

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

RACHEL ADAMS FCA

Sitting in public in London on 10 and 11 October 2006

Bernard Rice, of B J Rice & Associates, for the Appellant

Raymond Hill, counsel, instructed by the acting general counsel and solicitor to the Commissioners, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

In this matter we gave a Preliminary Decision released on 14 February 2005 following a three-day hearing that ended on 1 December 2004. The circumstances of the appeal are set out in paragraphs 1-36 of the Preliminary Decision.

Summary of Preliminary Decision

The background, shortly stated, is that Families for Children ("FFC"), the Appellant, is an independent fostering organization. FCC has appealed against a ruling contained in a letter of 1 April 2003 that from 31 January 2003 welfare services provided by state-regulated private welfare agencies, including commercial independent fostering agencies, are exempt for the purposes of VAT and that, if FFC were to wish to remain VAT registered, it would have to demonstrate that it was making or intended to make taxable supplies in addition to providing exempt welfare services.

That contested ruling had been based on the Value Added Tax (Health and Welfare) Order 2003 (SI 2003/24), which extended the exemption contained in VAT Act 1994 Schedule 9, Group 7, item 9 to cover the supply of welfare services by state-regulated private welfare agencies. The 2003 Order had been intended to implement Articles 13A(1)(g) and (h) of the Sixth VAT Directive, which exempted the supply of services which were "closely linked to welfare and social security work" and "closely linked to the protection of children and young persons" respectively. In both cases the Directive required that the relevant services be provided "by bodies governed by public law or by other organizations recognized as charitable by the Member State concerned". Those provisions are set out in full in paragraphs 5-10 of our Preliminary Decision.

FFC appealed against the ruling on a number of grounds:

(a) It argued that it was not a fostering "agency" as a matter of UK law;

(b) It argued that the 2003 Order was "ultra vires" section 31 of the VAT Act;

(c) It also argued that the 2003 Order was incompatible with the Sixth VAT Directive because (i) the words "welfare" and "protection" in Articles 13A.1(g) and (h) of the Directive had restricted meanings confined to services required by the child in question as a result of ill-health or financial impoverishment and protection from actual or perceived threats recognized by the courts, and "(ii) any "welfare" and "protection" was in fact carried out by local authorities, rather than by independent fostering organizations, such as FFC, which themselves simply provided general care of the fostered children;

(d) It was argued that FFC was not "recognized as charitable" by the United Kingdom for the purposes of Articles 13A.1(g) and (h).

In our Preliminary Decision we rejected arguments (a)-(c) above, concluding at paragraph 74 that:

"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".

The only question lest open in the Preliminary Decision was issue (d) above. This was the issue referred to the European Court of Justice in Kingscrest Associates Ltd and Another v Customs and Excise Commissioners (Case C-498/03) now reported in [2005] STC 1547. The question referred was whether profit-making entities, such as Kingscrest, are capable of being organizations "recognized as charitable by the member state concerned" within Articles 13A.1(g) and (h). That question is equally applicable to FFC.

On 24 August 2005 this Tribunal directed that the remaining part of the appeal be dealt with at a hearing to "be concerned solely with the impact of the Kingscrest ruling". We mention this last point because of the application, now made by FFC, to introduce some further arguments. We will deal with that matter at the end of this decision.

The Kingscrest decision

Kingscrest operated a number of residential care homes. It did so for profit and it was not a charity under the laws of England and Wales. It was, however, registered with the Commission for Social Care Inspection. (In the present case it is accepted that FFC is not a charity under the domestic law in that it aims to make a profit; moreover, as with Kingscrest, FFC is an organization registered with the Commission for Social Care Inspection under the Care Standards Act 2000 (see paragraph 15 of the Preliminary Decision).)

In the Kingscrest appeal, the Tribunal had been unable to resolve the question as to whether Member States may only recognize as "charitable" bodies which have the status of charity under their domestic law or whether Member States could extend exemption to other bodies having a social character. It referred the following three questions to the Court of Justice:

"1. Is it permissible to resort to other language versions of the … Directive … to elucidate the meaning of the word "charitable" … or must the word have the same meaning as in domestic law?

If Articles 13A.1(g) and (h) are to be interpreted as applying to an organization that is recognized as having a social character, are they to be interpreted as applying to a profit-making entity such as Kingscrest … ?

Are Articles 13A.1(g) and (h) … to be interpreted as meaning that they confer on Member States a discretion to recognize for the purposes of those provisions an organization which is registered under the Care Standards Act 2000 … but which is not a body governed by public law and does not have the status of a charity under the domestic law of the Member State concerned?"

In its judgment the Court decided that the words "organizations recognized as charitable by the Member State concerned" in Article 13A.1(g) and (h) were not to be interpreted in accordance with national law on charitable status. They had their own independent meaning in Community law (paragraphs 27 and 44). The Court went on to hold that the pursuit of a profit-making aim did not prevent a Member State from deciding to recognize a body as "charitable" within the Community law meaning of that term (see paragraphs 40, 43, 45 and 47 of the decision). The Court explicitly held in the second paragraph of its ruling at the end of the judgment that "The meaning of "organizations recognized as charitable by the Member State concerned" in Article 13A.1(g) and (h) … does not exclude private profit-making entities".

In reply to the third question, the Court stated at paragraph 49 that "Article 13A.1(g) and (h) … do not specify the conditions and procedures for recognizing organizations other than those governed by public law as charitable. It is thus in principle for the national law of each Member State to lay down the rules according to which recognition may be granted to such organizations".

The Court went on to say at paragraph 53 that, in deciding how to exercise their discretion as to the recognition of organizations as charitable for the purposes of Article 13A.1(g) and (h), "it is for the national authorities … to take into account … the existence of specific provisions, be they national or regional, legislative or administrative, or tax or social security provisions, the general interest of the activities of the taxable person concerned, the fact that other taxable persons carrying on the same activities already have similar recognition, and the fact that the costs of the supplies in question may be largely met by health insurance schemes or other social security bodies".

We come now to the main point of the present hearing. At paragraphs 53/54 and 55 the Court indicated that the Member State's discretion to recognize organizations as charitable was limited by the principles of equal treatment and fiscal neutrality which require respectively that organizations recognized as charitable be treated equally with "other operators making the same supplies in comparable situations" and that this does not result in the treatment of "similar supplies of services", which are thus in competition with each other, differently for tax purposes".

Although it was not the Court's function to reach a final conclusion as to whether the limits of the discretion had been exceeded by the United Kingdom, the Court did indicate at paragraph 53 that:

"The national court may … take into account in particular the fact that, under the amended VAT Act, entitlement to exemptions provided for in Article 13A.1(g) and (h) … extends to all organizations registered under the Care Standards Act 2000, as well as the fact that that Act and the amended VAT Act contain specific provisions which only reserve entitlement to those exemptions to organizations supplying welfare services, the content of which is defined by those Acts, but also govern the conditions for providing those services, by making the organizations which provide them subject to restrictions and checks by the national authorities, in terms of registration, inspection and rules concerning both buildings and equipment and the qualifications of the persons authorized to manage them."

In so holding the Court had followed the Opinion of the Advocate General (Colomer) who had earlier concluded at paragraph 40:

"The Member States enjoy a discretion as to whether to grant a private entity … the status of a "charitable organization", but, when exercising that discretion, they must observe the principle of neutrality of VAT and the principle of equal treatment as between taxable persons and must have regard to the nature of the activity and the aims for which it is carried on, so that it is classified by reference to predetermined, objective and abstract criteria which take account of the nature of the business, its organizational structure and the manner in which it is conducted. In all such cases, it is for the national court to appraise the extent to which such limitations are complied with."

He had earlier stated at paragraph 39:

"… a system like that provided for by the Care Standards Act 2000, which, by means of registration with the National Care Standards Commission, grants the status of "charitable organization" to those welfare organizations which meet the conditions laid down by the United Kingdom legislation, subject to constant monitoring by an ad hoc body, which may require the fulfilment of further conditions within the strict confines laid down by the legislature, appear to meet the requirements described earlier, although … that assessment is a matter for the referring court".

As far as we are aware Kingscrest have withdrawn their appeal to the Tribunal following the judgment of the European Court of Justice.

The Kingscrest issue : Are there any relevant points of distinction?

FFC argue that Kingscrest is not on all fours with the present appeal "because Kingscrest was concerned with welfare and social security work whereas FFC is concerned with the supply of goods and services closely linked to the protection of children and young persons."

FFC then advert to the Danish and Swedish versions of the Sixth Directive, "which used the term non-profit-making instead of charitable"; the argument for FFC continues by saying that "In no sense can it be asserted that the moneys received and profits made in respect of the supplies made by FFC is such that the body could be regarded as "essentially" charitable or non-profit-making, when the partners possess unfettered control of the assets of the firm and can use the profits and assets as they fit for their own benefit". FFC continues this argument with the assertion that Kingscrest makes a distinction between certain profit-making bodies which may be recognized as charitable and others which may not. Quoting from their skeleton argument – "It is … accepted that the pursuit of profit-making does not prevent a Member State from recognizing an organization as charitable but it does not follow that all private profit-making entities are to be recognized as charitable. It all depends on how the profits are used and to what extent they are available to the owners of the body. It will be submitted that the partners in FFC have full control over the assets and profits of the FFC and enjoy these to the fullest extent. This prevents formal or informal recognition as charitable on a European basis".

Those points, as we see them, do not provide any relevant distinction between the cases of FFC and that of Kingscrest. It is true that the Kingscrest case related to residential care homes rather than fostering agencies, but the relevant issue is the same. This was whether the Member State was allowed to exempt under Articles 13A.1(g) and (h) a profit-making entity which was not a charity as defined by the laws of England and Wales.

The Court in Kingscrest made no distinction as to the degree to which the profit motive influenced the relevant organization. Indeed, it specifically pointed out in paragraph 29 of its judgment that "the interpretation of the terms used in that provision [Article 13] must be consistent with the objective pursued by those exemptions and comply with the principle of fiscal neutrality inherent in the common system of VAT." Given that, as the Court pointed out at paragraph 30, the purpose of the exemption in Article 13A.1(g) and (h) is to treat "certain supplies of services in the general interest in the social sector more favourably for the purposes of VAT" and thereby "reduce the cost of those services and … make them more accessible to the individuals who may benefit from them", there appears to us to be no obvious reason as to why the profit motive influencing the organization in question should determine exemption. Conversely, to base exemption on that consideration would affect fiscal neutrality, insofar as it would appear to allow for a commercial fostering agency which was only partially influenced by a profit-making motive to be exempt whereas, on FFC's argument, a fostering agency which enjoys its profits "to the fullest extent" would be taxable.

As we read the Court's judgment in Kingscrest the Court made no such distinction between the degree to which the relevant body had profit-making as its aim. The Court explicitly considered and rejected in paragraph 33 an argument based on the Swedish and Danish wordings of the Directive, pointing out that "none of the other language versions thereof limited entitlement to the exemption thereunder to non-profit making activities". It went on to set out at paragraph 55 an exhaustive list of the objective considerations which the national authorities could take into account when deciding whether to recognize organizations which were not governed by public law as charitable. These did not include the degree to which the organization was subjectively motivated by profit.

That approach is in line with the Court's conclusions in Kennemer Golf and Country Club (Case C-174/00) [2002] STC 502. That case was concerned with the Article 13A.1(m) exemption relating to sporting services by non-profit making bodies. The Court acknowledged that where such a body systematically sought to achieve surpluses it would nonetheless be a non-profit making body. But if those surpluses were treated as profits available for distribution to Members, the body would lose its non-profit making status. Here, by contrast, paragraphs (g) and (h) do not, as the Court in Kingscrest (paragraph 40) observed, impose the non-profit making qualification. The result is that an organization like FFC, which is a partnership whose profits/surpluses belonged to its members, is not excluded from exemption on that ground.

The Kingscrest issue : The impact, if any, of the doctrine of fiscal neutrality

We pointed out in paragraphs 14 and 15 above the test of fiscal neutrality as formulated by the European Court of Justice in Kingscrest. The issue is whether exemption is applied equally to organizations making "the same supplies in comparable situations" or conversely whether "similar supplies of services, which are thus in competition with each other, [are treated] differently for VAT purposes".

The only services which are the same or similar to those provided by FFC to local authorities and which could be in competition with FFC's services are those provided by other fostering agencies. FFC does not point to any fostering agency making the same or similar supplies to it which has been treated as taxable by the UK authorities. Instead, FFC seeks to argue that it should not be treated as exempt insofar as the main component of the supplies that it makes to local authorities is a supply of foster care made to it by one particular foster carer. In support of this argument it relies on Case C-144/00, Hoffmann [2004] STC 740. Hoffman concerned the organizer of the world tour of the "Three Tenors". He had argued that he did not have to pay VAT on their fees on the basis that their services were "… cultural services … supplied by … other cultural bodies recognized by the Member State concerned", within the meaning of Article 13A.1(n).

The Customs point out that the only passage in the Hoffman case which supports FFC's argument is the Advocate General's opinion at paragraphs 51 and 52. There is nothing in the judgment of the Court itself to that effect. In answering the first question in that case, which was whether the term "other cultural bodies recognized by the Member State concerned" in paragraph (n) could cover individual soloists, the Advocate General had considered firstly whether the services provided by the Three Tenors to Mr Hoffman were cultural services (paragraphs 47-53) and then whether the three soloists were each individually capable of being cultural "bodies" (paragraphs 54-74). At paragraphs 51 and 52, the Advocate General expresses the view that because the services supplied by the Three Tenors to Mr Hoffman were a major cost component of Mr Hoffman's supply to the public, it was necessary to apply the exemption to the former supply as to the latter.

The Court of Justice by contrast confines its decision to the latter issue, as to whether the soloists as individuals were capable of providing services falling within the exemption or whether only groups of performers could be regarded as cultural "bodies". In particular the Court did not express the principle of fiscal neutrality in terms of the Three Tenors' services being a cost component of Mr Hoffman's supply to the public, but in terms of competition at the same level of the supply chain between the three individuals and a group of performers. At paragraph 27 of the judgment, the Court stated:

"… the principle of fiscal neutrality requires that individual performers, as long as their services are recognized as cultural, may be regarded, like cultural bodies, as bodies similar to public-law bodies supplying certain cultural services mentioned in Article 13A.1(n) …".

We agree with Customs that Hoffman does not support FFC's argument on fiscal neutrality. Indeed, in the earlier case of Sparekassernes Datacenter, Case C-2/95 [1997] STC 932, the Court of Justice had specifically rejected an argument that a cost component of a particular supply must bear the same VAT treatment as the main supply itself. That was the case of a Danish association of savings banks providing a data handling centre for its members. The association had argued that its services were exempt as a cost component of its members' financial services. The Court disagreed with them, holding at paragraph 65 that:

… the mere fact that a constituent element is essential for completing an exempt transaction does not warrant the conclusion that the services which that element represents is exempt."

If fiscal neutrality required more than the equal fiscal treatment of the same or similar supplies made by competing bodies at the same level of the supply chain, but also required supplies forming cost components of other supplies at different levels of the supply chain to be treated identically in fiscal terms, then that case could not have been decided the way it was. It seems to us that the fiscal neutrality test must be resolved by an examination of the circumstances of each particular case. The exercise is to determine whether similar supplies of services which are in competition with each other are treated differently for VAT purposes. It cannot be correct to adopt the approach of FFC in the present case by comparing FFC's supplies with the supplies made to it by one particular foster carer whose supplies appear to be treated as taxable.

For all those reasons we have concluded that the position of FFC cannot be distinguished from that of Kingscrest.

The implications of the decision in Stichting Kinderopvang Enschede, Case C-415/04

In paragraph 46 of the Preliminary Decision we made the point that FFC did not appear to be covered by the circumstances of the Kinderopvang Enschede reference. That case, according to the reference question (which was all we then knew about it), appeared to have been concerned with the activities of intermediaries. Here FFC operates as a principal. The opinion of the Advocate General and the Decision of the Court in Kinderopvang Enschede are based on the premise that the entity in question acted as an intermediary. This is clear from the Advocate General's opinion in paragraphs 19 and 50-52 and the Decision of the Court in paragraph 24. We quote from the Advocate General's opinion in paragraphs 51 and 52:

"It seems therefore that, in order for closely related supplies to be exempt, the principal activity must also be exempt and must thus satisfy all the conditions for exemption – including the requirement that it is performed by a body governed by public law or other organization recognized as charitable. Accordingly, where the Foundation acts only as an intermediary, for its services in that capacity to be exempted under Article 13A.1(g) or (h), the independent child care to which they are linked must also satisfy the conditions for exemption under those provisions."

Here, by contrast, FFC provides the services closely linked to welfare and to the protection of children in its own capacity as principal.

In Kinderopvang Enschede the Advocate General explored the question where the Article 13A.2(b) operates to exclude that entity's supplies from exemption. Paragraph 2(b) provides that the supplies of services shall not be exempted under paragraph 1(g) and (h) if they are not "essential to the services exempted". In paragraphs 55 and 56 of his Opinion the Advocate General observed:

"It seems to me that if the Foundation were to do no more than keep a list of all people known to offer child care and to make that list available to parents, the service could in no way be described as essential. There are many other ways in which parents can enter into contact with would-be carers. However, if the Foundation's screening and training activities are such that its services as intermediary provide access only to such competent and trustworthy carers as parents would otherwise have been unable to identify, then the latter services may be viewed as essential in order to gain access to child care of that quality, even if the Foundation does not accept responsibility for any shortcomings in the child care actually provided."

That issue was in point in Kinderopvang Enschede because the entity was acting as an intermediary and the questions whether its supplies were essential to its principal, the carer. But the requirement that the relevant services of FFC be essential to anything does not apply here. This is because FFC is (as we have found in our Preliminary Decision in paragraphs 52-62) making supplies as principal being supplies that are closely linked to welfare and closely linked to the protection of children and young persons.

The additional arguments

FFC applied in a letter of 5 October 2006 under rule 14 of the VAT Tribunal Rules 1986 to amend its Notice of Appeal to argue (a) that it does not independently carry out any economic activity and (b) that it, as well as its foster carers, are bodies governed by public law.

It is, we think, quite inappropriate that we should at this stage exercise any discretion we have under rule 14 to allow FFC to amend.

We observe that the original Notice of Appeal was lodged over three years ago in June 2003. The ground of appeal was that the 2002 and 2003 orders were incompatible with the Sixth VAT Directive on the same basis as was then being argued in Kingscrest. Following a directions hearing in September 2003 this Tribunal ordered FFC to put in an amended Notice of Appeal setting out further grounds of appeal that it wished to make. Those were in due course submitted in October 2003 in a 25 page document. On the penultimate page of that FFC asserted that they were not a body governed by public law:

"The fact that … the Local Authorities, public authorities governed by public law, contract-out the performance of their public obligations does not mean that the private contractor should be regarded as a Local Authority".

This point was made subsequently in a letter of 2 December 2003 where FFC stated – "It is common ground that neither Kingscrest nor FFC are organizations governed by public law". And when we heard the issues of the earlier hearing leading to the Preliminary Decision we noted that the Customs had conceded that FFC was not an "institution" and also not a "public body". We went on in paragraph 74 of the Preliminary Decision to state – "The only issue at this stage is whether FFC is an "agency"".

In all those circumstances we have concluded that it would be inappropriate and unfair for us to exercise our discretion to allow FFC either to withdraw its earlier concession or to amend its Notice of Appeal.

Having said that we mention that we did, de bene esse, listen to arguments on those points. Regarding the "public body" argument we would be against FFC. We note from the decision of the European Court of Justice in EC Commission v United Kingdom [2000] STC 777 at paragraph 55 that a key qualification for exemption under Article 4.5, relating to bodies governed by public law, is that the claimant should "form part of the public administration" as distinct from carrying on an independent economic activity. It was clear to us from the evidence that neither FFC nor the carers formed "part of the public administration" notwithstanding the fact that both of them were governed by the Care Standards legislation.

Turning to the other "inadmissible" argument, i.e. that FFC does not independently carry out any economic activity, we would reject that also. It is clear to us from the facts that FFC carries out its activities independently. FFC can decide how much to pay the foster carers without being tied to conditions for payment laid down by the local authorities. FFC profits from the difference between fees paid to it by the local authority and the fees it pays to carers. Moreover it is exposed to the risk of making a loss. It decides from which premises it would trade and which staff to hire. It is responsible for its own insurance. Those features would contradict any serious assertion that FFC did not independently carry out any economic activity.

For those reasons and for the reasons given in the Preliminary Decision, we dismiss FFC's appeal.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 31 October 2006

LON/02/559