The Learning Centre (Romford) Limited (LCR) provides day care services of a high level to vulnerable adults with learning difficulties. HMRC agreed that the services constituted welfare, but sought to add VAT to the services on the basis that LCR was not state regulated. This is because the UK VAT legislation only exempts supplies of welfare made by:
- public bodies
- state regulated private welfare institutions.
LCR took two arguments to the First Tier Tribunal:
- LCR was effectively state regulated on the basis that all staff had ‘disclosure barring service checks’ (DBS checks) better known by its old title CRB checks. This failed.
- That the UK legislation breaches the principal of ‘fiscal neutrality’ in European VAT legislation because state regulated providers achieve a different VAT treatment from those that are not state regulated. This argument succeeded.
The judge stated that the UK’s legislation had unlawfully used its discretion to only apply the exemption to state regulated suppliers. They also noted in making its decision that the UK law had discriminated against LCR, as it was not required to be regulated, whereas providers in Scotland and Northern Ireland had to be state regulated and so achieved VAT exemption when supplying the same services.
Why is this important?
The Judge stated that the EU legislation has direct effect on the UK and, therefore, exemption can be applied. This might be seen to put in doubt the validity of welfare providers charging VAT on services as a result of the entity making the supplies (often a trading subsidiary) not being state regulated.
However, whilst the EU legislation does have direct effect, the UK legislation as written can be relied upon until it is changed. Given that the UK is soon to be leaving the EU it is doubtful whether such a change will be made to the UK legislation.
We do not yet know whether HMRC will seek to appeal against the decision but it must be noted that the First Tier Tribunal decision only binds the parties that were part of that legal action. HMRC appealed against a similar decision in Life Services so we might expect such an appeal to be taken in this case.
Watch this space
In conclusion, the UK VAT rules can continue to be relied upon and so those taxpayers applying VAT to supplies in order to recover VAT on associated costs can continue doing so in accordance with the UK VAT legislation.
A point to ponder…
Local authorities providing welfare services are in a position whereby VAT can be recovered on all associated costs (under VAT Act 1994, Section 33). However, when the service is outsourced to a charity or state regulated provider that provider is unable to recover its VAT. Is this fair?
Some providers are structuring themselves in order to recover the VAT on costs but should this not be addressed by giving non-public body welfare providers the same status as public bodies? This has already been actioned in relation to services provided by hospices; why should the same rationale not be applied to the care sector which is widely acknowledged to be an extremely important sector where margins continue to be squeezed.