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Cite as: [2007] UKVAT V20316

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Care@Ltd v Revenue & Customs [2007] UKVAT V20316 (21 August 2007)

20316

VALUE ADDED TAX — franchised supply of nursing staff and unqualified staff — whether supply of staff or services — supply of staff — whether supply of unqualified staff amounts to "welfare services" under Group 7 Schedule 9 item 9 (b) — no — case dismissed

MANCHESTER TRIBUNAL CENTRE

CARE @ LIMITED Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: David Porter LLB (Chairman)

Jon P M Denny

Sitting in public in Manchester on 25 June 2007

Nigel Gibbon, a solicitor, instructed by the Appellant

James Puzey, of counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Care@ Limited ("the Appellant") appeals against an assessment in the sum of £60,568 (plus interest) representing VAT arrears for the periods 11/03, 02/04, 03/04, 06/04, 09/04, 12/04, 03/05, 06/05, and 09/05 notified to the Appellant by Notice of Assessment dated 1 March 2006 and the decision to assess the Appellant to a misdeclaration penalty in respect of the periods 03/04, 06/04, and 09/04 in the sum of £4,212 notified to the Appellant by a letter dated 31 May 2006.

Nigel Gibbon appeared for the Appellant. James Puzey, of counsel, appeared for the Commissioners and produced two bundles for the tribunal Both representatives produced skeleton arguments.

We were referred to the following cases:

Custom and Excise Commissioners v Reed Personal Services Ltd [1995] STC 588

Custom and Excise Commissioners v Kingscrest Associates Ltd and another [2002] EWHC 410 (CH)

University Court of the University of Glasgow tribunal decision 19052

Commissioners of Revenue and Customs v K 7L Childcare Services Limited [2005] EWGC 2414 (CH)

Preliminary matter

By a Notice dated 21 June 2007 Mr Gibbon applied for the hearing to be postponed. So that his application can be understood and to assist with this appeal, as will appear later it is helpful to set out the general facts specific to that application. The Appellant is a Franchisor and has developed a system for the supply of qualified nursing staff and unqualified staff to Nursing and Care Homes. The Appellant supplies Franchisees with sufficient information to set up their own agencies. This includes standard contracts, equipment, training, goodwill and the right to use the mark, method and systems. The weekly fee paid by the Franchisees purchases invoicing and payroll functions; ongoing management support and advice; and updates to the method and systems. The Franchisee then supplies the staff to the Nursing and Care Homes. Mr Gibbon (who we surmised had been instructed to appear at the hearing but had not been involved in formulating the appeal) had understood that the Commissioners had accepted that the supply of nursing staff by the Appellant was a supply of nursing services not staff in the circumstances where a Franchise had ceased to trade and as a consequence the supply of unqualified nursing staff was also the supply of services.

Mr Gibbon stated that he had received Mr Puzey's skeleton argument on Thursday 21 June and was concerned that it contests matters, which he understood had been agreed namely that the Appellant supplied services and not staff. In a meeting in March 2007 involving all the interested parties it had been agreed that the Appellant supplied nursing services and not nursing staff when they supplied the Nursing and Care Homes direct on the failure of a Franchise, and that the issue was whether the unqualified staff qualified as the supply of "welfare services" under item 9 of Group 7 schedule 9. He had thought this was the only remaining issue. He had not expected that he would have to produce evidence to substantiate that the Appellant did not supply unqualified nursing staff but supplied unqualified nursing services. Mr Mason a director of the company had not expected to give evidence to that effect and felt that he probably could not do so.

In reply Mr Puzey referred the tribunal to the decision letter of 11 November 2005, which confirmed that the Commissioners considered that the supply was of staff and was therefore standard rated. Mr Gibbon objected on the basis that that had been changed by the meeting in March. Mr Puzey stated that the dispute as to the supply of staff or services had continued after that meeting and that in any event the allowance by the Commissioners to treat the supply of qualified nursing staff as a supply of nursing services was concessionary only. In the statement of case at paragraph 5.3, the Appellant sets out the Respondents contentions:-

"On a true construction the Appellant supplies support services to its Franchisees which in turn make the supplies of staff to the client institutions. To the extent that the Appellant made supplies of unqualified staff in substitution for the Franchisees, those supplies were standard rated supplies of staff not of care."

Mr Johnson the Tribunal Chairman at an earlier directions hearing had stressed the urgency to have the appeal heard. The Appellant had sought an early hearing date for the appeal. The Appellant had had the opportunity prior to the hearing to serve witness statements but had chosen to do so. Mr Mason was present and could presumably have given evidence as to the contractual arrangements. Both parties had agreed that two days were needed for the hearing and none of the issues had been hidden from the Appellant.

The chairman having heard the submissions refused the application for the postponement for the following reasons:

(a) The case had been listed for two days. The Chairman, having read the statement of case before the hearing, had understood that evidence would need to be produced to establish whether the supply of the unqualified nursing staff was a supply of staff or services. Mr Gibbon, who had had several days to consider the matter, must have anticipated that some evidence would have to be led. He cannot have thought that legal argument would take up two days. The statement of case is dated 19 December 2006 and the amendments by the Appellant are dated 20 March 2007. Mr Gibbon must have been aware that there was going to be an issue as to the status of the unqualified nursing staff and since March 2007 he has had adequate time to consider the matter or to raise his concerns with the Commissioners. The Appellant has chosen not to call any witnesses, nor to provide witness statements. Presumably at the time that that should have been done the Appellant's advisers must have considered that the only issue related to the provision of "welfare services" and they should have advised the tribunal that only one day would be needed for the hearing. By agreeing that the two days should stand it can only be assumed that the Appellant expected evidence to be led as to whether the supply was of unqualified nursing staff or of their services.

(b) Mr Mason was present at the tribunal and as a director of the company must have had some idea of the contractual arrangements with the Franchisees. There is, in the bundle, evidence of the contracts in any event. As two days had been set aside for the hearing, if the Appellant felt that the facts have not been fully ventilated then there was ample opportunity to hear any further evidence from other witnesses on the second day.

(c) The Commissioners' representatives and witnesses had travelled from Birmingham and substantial costs had already been incurred. If the hearing were to be postponed the Tribunal would have lost the use of a court for two days and would have to find another two days to accommodate the hearing. A substantial penalty in cost for the postponement is not the most effective way of dealing with the appeal.

(d) The Chairman allowed the Appellant 10 minutes to take his clients instructions and withdrew with the Member.

The Chairman was advised by his clerk that Mr Gibbon and his client had withdrawn from the tribunal. The Chairman and Member returned to the Tribunal and decided to hear the case under regulation 26 (2) of The Value Added Tax Tribunal Rules 1986.

The Facts

In the absence of Mr Gibbon we have had to rely on the presentation of the facts by Mr Puzey from the stated case supported by the evidence of the contracts and correspondence in the bundles. We also are in possession of both parties' skeleton arguments. The Respondents originally assessed the Appellant to Value Added Tax on the basis that they supplied nursing and auxiliary staff and not a welfare service. This is because the Appellant has set up a franchise organisation so that third parties can have the benefit of the Appellant's knowledge and systems. The franchise agreement appears at tab four in the black bundle and sets out the terms under which the Appellant allows third parties (the Franchisees) to operate. (Franchisees are referred to variously in the three agreements described below as "The Company" and "The Employment Business" and we have referred to them throughout as the Franchisee to avoid confusion). The Franchise Agreement recites that the Appellant engages on its own account and through franchise outlets under the name "Care@" providing permanent and temporary nursing and care staff via a Nursing Agency and/or an Employment Agency. The Franchisee has the exclusive right to operate in a defined territory and for the privilege pays a weekly fee to the Appellant. According to the statement of case at paragraph 2.2 the weekly fee purchases:

Invoicing and payroll functions

Ongoing management support and advice

Updates to the method and systems

The Appellant provides the Franchise with all the necessary documentation and allows the Franchisee to use its logo.

Clause 9.1 of the Franchise Agreement provides for the effects of termination and appoints the Appellant as the Franchisee's agent amongst other things:

"9.5 To do all such further acts or things as may reasonably be requested by the Appellant in relation to the business"

We shall refer to this clause later in this judgment. The Agreement is a business agreement for the supply of the Franchise and in our opinion is standard rated.

The Franchisee enters into a contract with Temporary Workers who are going to be supplied to the Nursing and Care Homes. The agreement between the Franchisee and the Temporary Worker appears in tab 6 of the black bundle. Clause 2 states "These terms constitute a contract for services between the Franchisee and the Temporary Worker. For the avoidance of doubt these terms shall not give rise to a contract of employment". Clause 3 states: "The Franchisee agrees to engage the services of the Temporary Worker on the terms of the contract and will endeavour to obtain suitable assignments for the Temporary Worker to work as …". There is then added the type of work the Temporary Worker wishes to be engaged in (eg) Nurse, unqualified staff etc. Clause 6 states: "The Temporary Worker agrees that during every Assignment he/she will Cooperate with the Client's staff and accept the supervision and instructions of any responsible person in the client's organisation". This is a contract for services and the Temporary Workers are paid a wage by the Franchisee under PAYE.

The Franchisee contacts Nursing and Care Homes and offers to supply them with qualified nursing and unqualified staff as Temporary Workers. The Franchisee enters into an agreement with the Nursing and Care Homes which become the Clients of the Franchisee. (The agreement appears at tab 5 of the black bundle). The agreement provides that the introduction of the staff is confidential and if a Client employs one of the staff permanently then the Client has to pay a Recruitment fee to the Franchisee. The Franchisee does not accept any responsibility for information provided by candidates and recommends that the Client (ie the Nursing and Care Homes) makes its own enquiries. The definition section provides that a Temporary Recruitment arises when a candidate of the Franchisee is engaged by the Client without the client taking any responsibility for the payment of the wages. Clause 3 states that the Franchisee assumes responsibility for the payment of wages, deductions and payments of all statutory contributions in respect of NIC and the administration of income tax applicable as required by law. Clause 6 states that the client undertakes to supervise the Temporary Worker sufficiently to ensure their own satisfaction with reasonable standard of workmanship. Temporary Workers provided by the Franchisee are provided under Contracts for Services not contracts of service and are deemed to be under the control and direction of the Client. In clause 7 the Client agrees to be responsible for all acts, errors and omissions be they wilful, negligent or otherwise as though the worker was on the payroll of the Client.

The definition clause adds that the contract identified as a contract of service does not apply to Temporary Workers supplied by the Franchisee.

There is a separate agreement between the Franchisee and the Nursing and Care Homes in respect of Temporary Staff (also in tab five of the black bundle). That contract identifies an engagement as:

"any employment or use of the Temporary Worker on a permanent or temporary basis, whether under a contract of service or for services; an agency, license, franchise or partnership arrangement; or any other engagement"

Clause 2: The terms constitute the contract between the Franchisee and the Client for the supply of the Temporary Worker's services.

Clause 5: The Franchisee assumes responsibility for the payment of the wages and the Client pays a fee to the Franchisee for the introduction of the temporary staff. Clause 7 provides that the Franchisee is not liable for any loss, expense, damage or delay arising from any failure to provide any Temporary Worker … or from the negligence dishonesty misconduct or lack of skill of the Temporary Worker. Clause 7.2 states that Temporary Workers are engaged by the Franchisee under contracts for services. They are not the employees of the Franchisee but are deemed to be under the supervision, direction and control of the Client from the time they report for duty and for the duration of the assignment. The Client has to comply with all statutory obligations.

Mr Gibbon does not address the distinction between a supply of staff and a supply of services in his skeleton argument and we do not therefore have the benefit of his views on the matter. The Appellant maintained in an email from its representative dated 19 March 2007 (set out in paragraph 3.2 of the Statement of Case) that:

"My client is directly engaged in the provision of care services since it has ultimate control over its staff and does in fact have direct supervision of its staff whilst they are on assignment, this applying to qualified nurses and the unqualified"

Mr Puzey argues, and we agree with him, that essentially, the documents make clear that the temporary worker is a party to a contract for services, not a contract of services with the Appellant or Franchise holder. They do not have the rights or obligations of an employed person; see clauses 2, 3 and 6 of the Contract for Services of the Temporary Workers and terms of engagement (pages 52 and 53 of the black bundle). We are also assisted by the observations of Law J in Custom and Excise Commissioners v Reed Personal Services Ltd when he stated:

"It is I think no coincidence that many of the cases which cause difficulty in the VAT field, requiring the resolution of the higher courts, have concerned situations involving three parties … Where the facts involve only two parties there is necessarily little or no room for argument over who supplies what to whom. Where there are three (or more), the position may be very different. It should in my judgment be recognised that in that situation the parties' contractual arrangements, even though exhaustive for the purposes of their private law obligations, may not … indeed they need not … define and conclude issues arising as to the supplies under the 1983 Act; and when they do not, the resolution of the such issues remains a question of fact for the tribunal".

Since Mr Gibbon had decided to withdraw from the Tribunal we did not have the opportunity to hear evidence as to whether the contractual arrangements for the unqualified nursing staff amounted to a contract of services in spite of the fact that the concession did not apply to them.

We are advised that by concession the supply of Qualified Nursing Staff is a supply of nursing services. Clause 1.3 of the Statement of Case states:

"Following further contact between the parties and clarification by the Appellant of its trading practices, the Respondent have agreed to withdraw the contested assessments in so far only as they relate to the Appellant's supplies of qualified nursing staff"

Clause 2.7 is the amendment by the Appellant and states:

"In the circumstances where the franchisee operating in a particular geographical area ceases to trade, the Appellant itself makes supplies of nursing staff, both qualified and otherwise, to care homes and hospitals which the franchisee would have served. The Respondents are now satisfied that the supplies to which the contested assessments relate were made in these circumstances and are to be regarded as the supplies of the Appellant itself. Of the total of such supplies for the periods assessed, 29% in value (£142,026.01) were of qualified nursing staff and 71% in value (£351,918.21) were unqualified staff. The Respondents now accept that the Appellant was entitled to exempt its supplies of qualified staff, but maintain the ruling that the supplies of unqualified staff should properly have been standard rated by the Appellant"

At the time of Mr Gibbon's application for a postponement, Mr Puzey stated that the allowance for qualified nursing staff was concessionary but in his addendum to his skeleton argument he states:

"5. The Appellant relies upon the acceptance by the Respondents that its supply of registered nurses is exempt as a concession that the Appellant is generally making supplies of welfare services under item 9 and not staff. That is not the case (see paragraph 5.3 of the amended statement of case). The acceptance of the supply of registered staff is as a result of a long-standing policy of the Respondents which was developed on the understanding that nurses' agencies bore legal responsibility for the supply of care by the nurses they supplied. This area of policy is currently under review and is the subject of liaison between the respondent and the healthcare sector.

However, there has never been a similar policy in respect of unregistered staff"

We find ourselves in some difficulty at this point as we are unclear whether this is a concession or a policy and the extent to which it relates to nurses and or unqualified nursing staff as supplied by the Appellant. Further we have heard no evidence as to the type of work that the unqualified nursing staff perform. The Appellant's skeleton argument indicates that the Appellant supplies unqualified unregulated nursing staff and in the absence of any evidence from the Appellant we must accept that the Commissioners arrangement (as a concession or policy) can only relate to regulated Qualified Nursing staff. As a result unqualified and unregulated nursing staff do not fall within the arrangement. In those circumstances the Appellant, when acting in the role of a Franchisee who has ceased to trade (under clause 9.5 of the Franchise Agreement referred to above), is supplying unqualified nursing staff and not their services and the supply is standard rated.

As the supply is of staff and not of welfare services the exemption pursuant to Group 7 item 9(b) to schedule 9 VATA 1994 will not apply. If in fact we are incorrect as to the conclusion that the supply is one of staff and not of services it is appropriate (in the absence of Mr Gibbon) for us to consider the arguments put forward by the Appellant in support of the exemption for welfare services. In that regard we can only rely on the skeleton arguments of both parties before us. The argument by the Appellant relies on the fact that they are supplying welfare services and not staff and Mr Gibbon confines his analysis to the question of whether state-regulated private welfare agencies may exempt the supply of welfare services in respect of unregulated staff.

The Law

Article 13. Exemptions within the territory or country provides:

"A. Exemptions for certain activities in the public interest provides

Without prejudice to other Community provisions, Member states shall exempt the following under conditions which they shall lay down for the purposes of ensuring the correct and straight forward applications 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 including those supplied by old peoples' homes, by bodies governed by public law or by organisations recognised as charitable by the Member State concerned …

(k) certain supplies of staff by religious or philosophical institutions for the purpose of paragraphs (b), (g), (h) and (i) of this article and with a view to spiritual welfare."

Item 9, Group 7 Schedule 9 VATA 94 provides:

"9. The supply by-

(a) a charity

(b) a state regulated private welfare institution or agency

(c) a public body

of welfare services and goods supplied in connection with those welfare services."

Note 6 to item 9 provides:

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

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

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

(c) the provision of spiritual welfare by a religious institution as part of a course of instruction or a retreat, not being a retreat designed primarily to provide recreation or a holiday.

and, in the case of services provided by a state regulated private welfare institution, includes only these services in respect of which the institution is so regulated."

Note 8 to item 9 provides:

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

Mr Puzey in his addendum to his skeleton argument, advises that the Appellant is regulated under the Care Standards Act 2000. That act repealed the Nurses Agency Act 1957, which applied to agencies involved in the supply of registered, certified or enrolled nursing professionals, and set up the National Care Standards Commission under whose authority the Commission for Social Care Inspection operates ("CSCI"). CSCI is responsible for the registration and inspection of care homes, nurses' agencies, domiciliary care agencies and adult placement services. Regulation 2(1) defines "nurse" as meaning registered nurse, midwife or health visitor. Agencies may combine the supply of registered nurses etc and staff, but there is no regulatory regime for the supply of unqualified staff. Both parties accept that the unqualified nursing staff are not regulated.

On the assumption that the Appellant is acting as principal and is supplying "welfare services" Mr Gibbon submits that the Commissioners accept that unqualified nursing staff would qualify as "welfare services" if those supplies were regulated then the exemption should be available. Mr Puzey relies on the final paragraph of Note 6 item 9 for his submission that the "welfare service" cannot be exempt for unregulated staff which reads:

"and, in the case of services provided by a state regulated private welfare institution, includes only those services in respect of which the institute is so regulated".

The Commissioners position is that "state-regulated" means that the Appellant must be acting in that capacity in respect of the supply for the exemption to apply, otherwise the words "state-regulated" are unnecessary. Note 6 of item 9 requires a state regulated private welfare institution to be exempted only in relation to those matters in respect of which it is regulated. It follows that a state regulated welfare agency can only claim exemption for regulated staff.

Mr Gibbon argues that on any reasonable interpretation of Note 6, exclusions from the definition of "welfare services" is limited to state regulated welfare institutions and does not extend to welfare agencies Item 9 lists 4 categories of body to which the VAT exemption will apply namely:

Charities

State regulated private welfare institutions

State regulated private welfare agencies

Public Bodies.

Of those 4 bodies Note 6 only refers to institutions when excluding non-regulated services from the definition of "welfare services". If it had been intended to extend the exclusion to welfare agencies no doubt the words of Note 6 would have stated this clearly. Similarly the exclusion is not drafted to extend to charities and public bodies. Mr Gibbon referred to Notice 701/57/07 – Health Professionals. We do not find that reference helpful and agree with Mr Puzey that this notice is concerned with supplies under item 4 to Group 7 and not item 9. Whatever the position is or is accepted to be in respect of supplies made by the Appellant within item 4, this appeal concerns supplies within item 9 and the interpretation thereof. Mr Gibbon is on firmer ground when he submits:

"However, the rationale behind allowing exemption for supplies of unqualified and unregistered nursing staff by a welfare agency to a hospital or nursing home so long as the services are directly connected with welfare of patients might be that those conditions ensure that the exemption extends only to purely welfare services, whereas an institution regulated by the CSCI will provide a range of services to patients some of which are directly welfare related and some of which eg. Catering and hairdressing are not."

We have decided that if the argument is pursued by Mr Gibbon under Group 9 and it is decided that the Appellant is acting as a Principal in the supply of unqualified nursing services then they qualify as "welfare Staff" and are exempt. Item 9, Group 7, Schedule 9 VATA 1994 provides for the supply by a state regulated private welfare agency, which the Appellant is. Note 6 to item 9 define "welfare services" as directly connected with (a) the provision of care, treatment or instruction designed to promote the physical or mental welfare of elderly, sick distressed or disabled persons. The parties to this appeal appear to have agreed that the Appellant provides unqualified nursing staff within those parameters. There is no provision in Note 6 that requires the unqualified nurses to be regulated. The Appellant is regulated and that suffices. The reference to institutions anticipates the possibility of services beyond those of welfare. It may be that those institutions would be regulated to provide services beyond the strict definition and if they are regulated to do that then those services will be exempt.

As mentioned before for the purposes of this appeal we have decided that the Appellant is supplying staff and not services and as a result the assessment of £60,568 plus interest must stand and the appeal is dismissed. We have not been addressed by either party as to the misdeclaration penalty but it seems to us that the Appellant may well be able to establish a reasonable excuse. Further we have not been asked to award costs against the Appellant in the light of the departure from the tribunal by Mr Gibbon and Mr Mason and we award none. Regulation 26(2) provides that this decision, given in the absence of the Appellant, may, on the application of the Appellant or any other party interested and served at the appropriate tribunal centre within 14 days after the date when the decision of the tribunal is released, be set aside by a tribunal on such terms as it may think just.

DAVID S PORTER

CHAIRMAN
Release Date: 21 August 2007

MAN/06/0454