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Adult daycare centres hit by Court of Appeal VAT ruling
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Commercial daycare providers must charge VAT


The Court of Appeal ruled that daycare services provided to vulnerable adults are subject to VAT if the provider is not a charity, a public body or state regulated.

20th Aug 2021
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The appeal court’s recent decision on daycare VAT only applies to services supplied by private bodies in England and Wales, not where the similar services are provided in Scotland or Northern Ireland. HMRC issued a new VAT Brief (9/2021) to clarify what providers have to do with regard to paying VAT on daycare services.

This ruling could potentially affect anyone offering daycare services in England and Wales, in particular if the taxpayers have stood an appeal behind the appellants who appealed to Court of Appeal (CoA).

The case

LIFE Services Limited (LS) and The Learning Centre (TLC) (Romford) Limited jointly appealed [2020 EWCA civ 452] an upper tribunal (UT) decision [2019 UKUT002 TTC] that had found in HMRC’s favour, having won their previous appeal at the first tier tribunal (FTT).

LS and TLC both provided services to individuals with care plans (documents setting out the care a person needs, how these can be met and who will help meet them). Funding was supplied either directly or indirectly by the local authority and this was treated as exempt income by both companies. Crucially, neither LS nor TLC were regulated by the Care Quality Commission - the independent regulator of health and social care in England.

The legislation

Item 9 Group 7 Schedule 9 VATA 1994 exempts from VAT the supply of welfare services by a:

  • charity
  • state-regulated private welfare institution, or
  • public body.

Note 8 of Group 7 goes on to define “state regulated”.

The tribunals

HMRC argued that LS and TLC did not make exempt supplies. The FTT allowed the joint appeal against this decision; HMRC appealed and the UT agreed with HMRC’s interpretation, on the basis that LS was not state-regulated.

The UT also confirmed the fiscal neutrality requirements were met. LS and TLC appealed to the CoA.

Court of Appeal

The CoA ruled that the various legal provisions LS relied on did not amount to the care provider being state-regulated, so the requirements of Item 9 were not met and the supplies could not be exempted and should be standard rated.

Both companies argued that the requirements of Item 9 contravened the principle of fiscal neutrality that there should be equal VAT treatment for similar items sold by similar businesses. They stated they were disadvantaged as follows:

  • Charities are entitled to a different VAT treatment to private operators
  • Charities are entitled to exemption even if they are not devoted to social wellbeing
  • Organisations in England and Wales, where state regulation is not compulsory, are at a disadvantage compared to those in Scotland and Northern Ireland, where it is.

The CoA confirmed there was no breach of the principles on the basis that:

  • Item 9 distinguishes between private welfare bodies subject to regulation and those that are not. While charities are not state regulated, they are subject to supervision by the Charity Commission, so there is little relevant difference between them and state regulated entities
  • As Item 9 goes on to require that an entity must be supplying welfare services, it is not possible for a charity (or any other organisation) which is not devoted to social wellbeing to qualify for the exemption
  • Item 9 does not take into account the reason an entity is state regulated, nor the geographic location of the entity. Therefore, the fact regulation is compulsory in some areas but not others is irrelevant for these purposes.

HMRC’s appeal was allowed.

What happens now?

HMRC will now contact any other taxpayers who had cases stood behind the above case to confirm if they wish to proceed.

Non-charitable daycare providers in England and Wales who have previously treated their supplies as exempt should now make the necessary adjustments to their records and take account of the amended VAT figures.

Net errors arising in the previous four years of up to the higher of £10,000 or 1% of box 6 (to a maximum of £50,000) can simply be adjusted via the next return; all other errors from the previous four years must be declared via form VAT652.

No disclosure

I always like to remind my clients that adjusting the VAT return for errors does not count as disclosing those errors to HMRC. Thus, should HMRC later attempt to charge penalties, it would not consider that the taxpayer had already disclosed the error. If this is a concern, form VAT652 can be used to make a full disclosure, even for errors below the above thresholds.

Replies (3)

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By Justin Bryant
24th Aug 2021 10:14

And like the £10 M&S meal & wine deal VAT case, it's the end consumer that will suffer with higher prices. In this case vulnerable consumers. See also:

Thanks (0)
25th Aug 2021 21:37

A helpful article - If these services have been found as not exempt, do you happen to have any information on what scope or precedent there may, be to invite the local authority to now pay the vat element, which previously these private/non charity companies have not previously charged.

Thanks (1)
Replying to JD:
By VATs-enough
25th Aug 2021 23:37

Important to note that the supplies made by either entity, were to some degree or another, made to the individuals not the LA.

Reading the decisions in LIFE, approx 50% of the disputed amount related to supplies to individuals. Couldn't see an equivalent number for TLC but implication was that LA's paid individuals/carers who then paid TLC.

As these supplies would have been to the individuals/carers, VAT recovery under S33 not in point for vast majority of VAT involved.

But yes, in principal a belated VAT invoice could have been issued. Having it paid by the recipient would be a matter of contractual law, agreed prices (VAT inc/exc).

Thanks (2)