The High Court upheld a decision of the VAT tribunal ([2005] BVC 2,493) that expenditure incurred in the construction of a mental nursing home was zero-rated for VAT purposes since the home did not come within the exception in Sch. 8, Grp. 5, note (4) to the Value Added Tax Act 1994 in respect of hospitals, prisons or similar institutions.

Facts

The taxpayer, a civil engineering company, contracted with a customer to construct a mental nursing home to be known as the Dene. The customer certified that it intended to use the Dene for a relevant residential purpose and, on the basis of the customer's certificate, the taxpayer zero-rated its construction services. Before the construction work was completed, the customer was taken over by another company, which registered the Dene with the local health authority. Shortly afterwards, Customs visited the property and concluded that its actual use was that of an institution similar to a hospital or prison and that the construction services were excluded from zero-rating. An assessment was issued to the appellant, in the sum of £763,072, to recover VAT on the construction. The taxpayer submitted that in focusing on the actual use, rather than the intended use, Customs had failed to apply the clear terms of the VAT legislation. In the view of the taxpayer, if the tribunal were to accept that only the intended use was relevant, it must follow that the assessment was not made to best judgment. A further issue was that, since it was common ground that the use of the Dene would have fallen within the zero-rating provided by item 2 of Grp. 5 of Sch. 8 to the 1994 Act but for the exception for hospitals, prisons and similar institutions in note (4) to Grp. 5, the tribunal should look at the scope of the exception. The taxpayer contended that the intended use of the Dene was neither as a hospital or similar institution, nor as a prison or similar institution. Therefore, the intention was to use the Dene for a relevant residential purpose with the result that the construction was eligible for zero-rating.

Customs accepted that a mental nursing home could not be a hospital, but maintained that it was an institution similar to a hospital, so that its use fell within the exception in note (4). The Dene, being registered as a mental nursing home rather than as a residential care home, fell within the description hospital or similar institution’. They next submitted that the Dene had always been intended to be an institution in which treatment was to be given to mentally disordered patients. Alternatively, they argued, the Dene was an institution similar to a prison: it was intended to accommodate patients detained under the Mental Health Act 1983, some of those patients having committed a criminal offence. Although the Dene was not a penal institution, there were sufficient similarities between it and a prison for it to be properly regarded as an institution similar to a prison. There was, accordingly, no entitlement to zero-rating.

The tribunal allowed the taxpayer's appeal concluding that Customs had erred in considering only the actual use of the Dene following its completion. Whilst Customs were entitled to take into account the actual use of the Dene shortly after it opened, that did not excuse their failure to apply the correct test. The intended use of the Dene was for relevant residential purposes and the construction services were not excepted from zero-rating by note (4) to Grp. 5. Moreover, the assessment under appeal was made arbitrarily and, therefore, not to the best judgment of the commissioners ([2005] BVC 2493; Decision No. 18,975). Customs appealed.

Issue

Whether, following receipt of a certificate of relevant residential use, the taxpayer was entitled to zero-rate the supply of its services in the construction of a mental nursing home regardless of the actual use of the building.

Decision

Sir Andrew Morritt C (dismissing the appeal) said that the tribunal was right to hold that the intended use of the Dene at the time the taxpayer supplied its services and building materials in its construction was not as a hospital, prison or similar institution. The starting point was the ordinary meaning of the word ‘hospital’. The relevant meaning given in the Shorter Oxford English Dictionary was ‘an institution for the care of the sick and wounded, or those who require medical treatment’. In Collins English Dictionary it was ‘an institution for the medical, surgical, obstetric, or psychiatric care and treatment of patients’. Chambers 21st Century Dictionary defined the word as ‘an institution, staffed by doctors and nurses, for the treatment and care of people who are sick or injured’. The common element in all those definitions is the provision of medical treatment and care.

The context of Grp. 5 was also important. Zero-rating was allowed in respect of services and building materials supplied in connection with a building intended for use ‘solely for a relevant residential purpose’. Note (4) defined what was a relevant residential purpose. In their normal meaning neither hospitals, prisons, hotels nor inns exist for the purpose of providing residential accommodation; nor were they normally occupied as residences by those who were accommodated therein. Thus the exceptions appeared to be designed to exclude the specified institutions if and in so far as their use might actually come within the principal parts of the definition. Accordingly, it was necessary in each case to contrast the relevant paragraph of note (4) with the relevant part of the exception. If, as was accepted in this case, the Dene was ‘a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of past or present mental disorder’, then it could only be excluded if its use was as a hospital or similar institution.

The contrast was between a home or institution providing residential accommodation with personal care for those who needed it for the prescribed reason and an institution providing medical treatment and associated care, usually on a short-term basis. The focus of note (4) in the context of Grp. 5 was on the intended use of buildings for residential accommodation, as opposed to short-term occupation. A hospital was a building used for treatment for the cure or amelioration of a medical condition as opposed to personal care; the former was likely to require short-term occupation, the latter long-term residence. Given that construction, it was plain that on the findings of the tribunal the Dene was not a hospital or similar institution.

Furthermore, a ‘prison or similar institution’ required a penal element. The fact that some of the patients might have been convicted of an offence was not sufficient, when, even in the case of those patients, it was intended that they should be admitted to the Dene because they needed both residential accommodation and personal care. It was not intended that any of the residents of the Dene should be admitted because they had committed an offence. Further the intended regimen for a resident was neither punitive nor rehabilitatory in a penal sense. In all the circumstances, the tribunal was right to conclude that the intended use of the Dene at the time the taxpayer supplied the relevant services and materials was not as a hospital, prison or similar institution.

Chancery Division.

Judgment delivered 16 December 2005.