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Welfare services – can they be taxable?

26th Sep 2019
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We are seeing a number of cases involving welfare providers where the ‘customer’ is a Local Authority. The provider prefers his supplies to be taxable since the LA can recover the VAT. The provider is not exempt and therefore recovers input tax. In the case of Lilias Graham Trust (LGT) HMRC challenged this, arguing that the supplies should be exempt not taxable. Anecdotal evidence suggests that this is a growing trend and some providers are closing as a result.

The exemption for welfare is widely drafted in both EU and UK law.

Note 6 to exempt Group 7 reads:

(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 course or a retreat designed primarily to provide recreation or a holiday,

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

Some providers try to argue that they do not provide ‘care.’ However, the Tribunal has repeatedly pointed out that the exemption applies to services ‘directly connected with’ care. Some decisions (including LGT)) have considered the precise effect of this wording. [LGT argued that its services were only indirectly connected with care.]

Another angle to pursue is the status of the provider. This is because the legislation restricts exemption to supplies by:

       (a)     a charity,

       (b)     a state-regulated private welfare institution or agency, or

       (c)     a public body, (Item 9 to exempt Group 7)

The difficulty here is the wording in Item 9(b). Even where the provided is not a charity, it almost always has to be “state-regulated.” Public opinion has been a driver over many years with the result that providers are increasingly required to be regulated. Local authority contracts often insist on such regulation. The scope of such regulation is also wide; see VATWELF2090 for the HMRC interpretation of this wording.

 In LGT, as I mentioned, HMRC ruled that its supplies were exempt. The FTT upheld that decision.

https://www.bailii.org/uk/cases/UKFTT/TC/2019/TC07346.pdf 

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