The European Court of Justice (ECJ) ruled that the supply of telephone services and the hiring out of televisions to in-patients by persons covered by art. 13(A)(1)(b) of Directive 77/388, and the supply by those persons of beds and meals to people accompanying in-patients, did not amount, as a general rule, to activities closely related to hospital and medical care within that provision. It would only be otherwise where those supplies were essential to achieve the therapeutic objectives sought by the hospital and medical care and their basic purpose was not to obtain additional income for the supplier by carrying out transactions in direct competition with those of commercial enterprises liable for VAT. It was for the referring court, taking account of all the specific facts in the litigation before it and, if appropriate, of the content of the medical prescriptions drawn up for the patients concerned, to determine whether the services supplied satisfied the conditions.

Facts

The taxpayer was a company providing hospital and medical care. Following an audit of the taxpayer's accounts for the tax years 1992 and 1993, the authorities considered that the income earned by the taxpayer from, first, the provision of telephone services and the hiring out of televisions to in-patients and, secondly, the provision of beds and meals to persons accompanying them should be subject to VAT on the ground that those services could not be considered activities closely related to hospital and medical care. The company's tax liability was adjusted accordingly.

The taxpayer appealed on the basis that the services at issue contributed to patient care and to maintenance of patients’ social contacts and, consequently, helped to hasten their recovery by creating favourable conditions from a psychological point of view. The appeals were dismissed on the ground that since the services at issue were intended to facilitate patients’ hospital stays and did not contribute to their care, they could not be considered closely related to hospital care. The national court made a reference to the ECJ for a preliminary ruling on the interpretation of art. 13(A)(1)(b) of Directive 77/388 (‘the sixth directive’).

Issue

Whether the services at issue fell within the concept of ‘activities closely related’ to hospital and medical care for the purposes of art. 13(A)(1) of the sixth directive.

Decision

The ECJ (Third Chamber) (ruling accordingly) said that services fell within the concept of an ‘activity closely related’ to hospital or medical care in art. 13(A)(1)(b) only when they were actually supplied as a service ancillary to the hospital or medical care received by the patients in question and constituting the principal service. A service could be considered ancillary to a principal service where it constituted not an end in itself but a means of enhancing the enjoyment or benefit of the principal service supplied by the provider.

For the purpose of determining whether services such as those at issue amounted to a means of enhancing the benefit of hospital and medical care dispensed by the taxpayer, it was appropriate to take into account the purpose for which those services were carried out. The exemption of activities closely related to hospital and medical care provided for in art. 13(A)(1)(b) was designed to ensure that access to such care was not prevented by the increased costs of providing it that would follow if it, or closely related activities, were subject to VAT. The hospital and medical care envisaged by that provision was that which had as its purpose the diagnosis, treatment and, in so far as possible, cure of diseases or health disorders. Accordingly, taking account of the objective pursued by the exemption provided for in art. 13(A)(1)(b), it followed that only the supply of services which were logically part of the provision of hospital and medical care services, and which constituted an indispensable stage in the process of the supply of those services to achieve their therapeutic objectives, was capable of amounting to ‘closely related activities’ within the meaning of art. 13(A)(1). Only such services would influence the cost of health care which was made accessible to individuals by the exemption in question. That finding was confirmed by the first indent of art. 13(A)(2)(b), according to which the member states were not to exempt the supply of services envisaged, inter alia, in art. 13(A)(1)(b) if they were not essential to the transactions exempted. That provision, which was binding on the member states, laid down conditions which had to be taken into account for the interpretation of the various exemptions referred to which, like that provided for in art. 13(A)(1)(b), related to the supply of services or goods which were ‘closely related’ or ‘closely linked’ to an activity in the public interest.

In relation to the exemption provided for in art. 13(A)(1)(i) concerning the supply of services ‘closely related’ to university education, the carrying out of research projects for consideration, even though it might be regarded as of great assistance to university education, was not essential to attain its objective, in particular, the teaching of students to enable them to pursue a professional activity, and, accordingly, it could not benefit from that exemption. Taking into account the objective of the exemption provided for in art. 13(A)(1)(b) and having regard to the wording of art. 13(A)(2)(b), those findings were equally valid for the interpretation of the concept of ‘an activity closely related’ to hospital and medical care featuring in the first of those provisions. Subjecting services which were not of an ancillary character to VAT did not have the effect of increasing the cost of the hospital and medical care the accessibility of which the provision sought to ensure for individuals, since those services were not essential to achieve the therapeutic objectives pursued by that care. Moreover, the imposition of VAT on such services respected the principle of fiscal neutrality, which precluded, in particular, treating similar supplies of services, which were thus in competition with each other, differently for VAT purposes.

When a medical establishment provided services such as those at issue, it was in competition with taxable persons who provided services of the same nature, such as providers of telephone and television services offered to in-patients, and hotels and restaurants as regards the provision of accommodation for people accompanying them. Thus, in conformity with the second indent of art. 13(A)(2)(b), services such as the present were also not to be granted exemption as provided for in art. 13(A)(1)(b) if their basic purpose was to obtain additional income for the person who provided them, a matter which was for the referring court to verify on the basis of the specific facts of the litigation before it.

European Court of Justice (Third Chamber). Judgment delivered 1 December 2005.