The High Court held that the supply of the services of carers to private welfare institutions did not constitute the supply of welfare services to which the exemption in VATA 1994, Sch. 9, Grp. 7, item 9 applied.

Facts

The taxpayer company supplied employed qualified nursery nurses, nursery assistants and carers, collectively referred to as 'carers', to private day-nurseries, pre-schools and local education authority schools. Those nurseries and schools were acknowledged as being engaged in the care or protection of children as described in VATA 1994, Sch. 9, Grp. 7, Note (6). The staff supplied by the taxpayer were not medically registered, save for one nurse, but on the whole were qualified nursery nurses and the company itself was not regulated for the purposes of its business. The tribunal drew two conclusions from the facts presented: that the taxpayer, through the provision of its services, was directly connected with the care or protection of children and young persons; and that the taxpayer, in view of the control exercised by the state over its staff, was closely linked, as regards the services supplied, with the supplies made by the nurseries and schools.

Customs accepted that the taxpayer was a private welfare agency, but submitted that it was not 'state-regulated' in accordance with Note (8) to Grp. 7 and thus did not qualify for exemption under item 9(b) of Grp. 7. In Customs' view, all that the company did was supply staff. The company relied on the extensive degree of government control that existed in the day-care sector for young children. It maintained that the regulations were so broad in their operation that they amounted to regulation of the company. In terms of the status of the person providing the services, as considered in Gregg v C & E Commrs (Case C-216/97) [1999] BTC 5,341; [1999] ECR I-4947, the taxpayer argued that its legal identity as a company was irrelevant as to whether the services of the carers were exempt.

The VAT Tribunal held that there existed such control over the taxpayer company as the definition of 'state-regulated' required and that to the extent that the nurseries and schools were regulated, and the carers supplied by the appellant were controlled, the appellant's supplies satisfied the criteria for exemption within item 9(b) ([2005]) BVC 2558; Decision No. 19041).Customs appealed

Issue

Whether supplies made by the taxpayer company were standard-rated as contended by Customs, or exempt under item 9(b) of Grp. 7 of Sch. 9 to VATA 1994 as argued by the taxpayer.

Decision

Hart J (allowing the appeal) said that Customs' criticism of the tribunal's reasoning was well-founded as it did not directly address the argument that what the taxpayer was supplying was the services of its staff rather than the welfare services themselves. The services supplied by the taxpayer were only indirectly connected with the care of children. The tribunal's reference to the system of state control of carers was erroneous because the system of state control described by the tribunal was a system of control exercised over the hiring institutions, rather than over the taxpayer or its staff.

That there was a distinction between the nature of the service supplied by the taxpayer (i.e. the supply of staff) and the service provided by the recipient of that supply was clear, both as a matter of principle and authority (C & E Commrs v Reed Personnel Services Ltd [1995] BTC 5,217 considered). The fact that the institutions to whom the services of staff were supplied were themselves regulated by the state, and that such regulation included the imposition of duties on those institutions in relation to the suitability of the personnel used by them in the delivery of welfare services, could not provide a basis for saying that the taxpayer was itself making supplies of welfare services.

On the issue of whether the taxpayer was 'state regulated' as defined in Note (8), the tribunal's reasoning ignored the clear finding of the tribunal that the taxpayer was not itself regulated for the purposes of its business and there was nothing to indicate that, in the immediate future, it might become so regulated, or apply to become so regulated. There was no warrant in the language of the statute for reading the definition of'state-regulated' as extending to the indirect form of regulation identified by the tribunal. It was unnecessary for that conclusion to have resort to the principle that exemptions were to be construed strictly (cf. Swedish State v Stockholm LindoparkAktiebolag (Case C-1 50/99) [2001] BTC 5021; [2001] ECR I-493, at para. 25). However, that principle plainly reinforced that conclusion.

Chancery Division. Judgment delivered 4 November 2005.