VAT and the welfare exemption

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HMRC has lost a significant VAT case concerning a charity which provides payroll services to disabled persons. The charity successfully argued that such supplies should not be subject to VAT, using the welfare exemption. Les Howard reviews the verdict.

I had understood that Cheshire Centre for Independent Living (TC07182) was a test case, as many other charitable organisations provide similar services. Had this case been decided against the taxpayer, it would have affected a large number of providers.

Background facts

The case concerns how a local charity administers ‘direct payments’ to disabled persons. The decision explains the circuitous method by which such payments reach the recipients. The payments are granted by local authorities and NHS clinical commissioning groups and are associated with a care plan or support plan.

Many disabled persons engage a personal assistant to help them with personal and domestic needs. The scheme of direct payments requires that the disabled person has to formally employ the personal assistant. In most cases, the disabled person is not equipped to manage a payroll. This is where Cheshire steps in and delivers the payroll service on behalf of the recipient. The cost of this service is covered by the direct payments. Of course, if this service were taxable rather than exempt from VAT, it would eat into the amount of money left for the recipient.

Exemption for welfare services

Welfare services are defined as services provided by a charity which are directly connected with the provision of care, treatment or instruction designed to promote the physical or mental health of elderly, sick, distressed, or disabled persons (VAT Act 1994, Sch 9, Group 7, Item 9, Note 6). The taxpayer did not argue that its services fell within strictly within the definition of “care, treatment or instruction,” but argued that its services were closely linked with services of welfare.

What is closely linked?

This “closely linked” issue was addressed by the ECJ in Brockenhurst College [2017] C-699/15. That case examined whether certain services were closely linked with services of education.

HMRC’s comment on Brockenhurst in its VAT manual VATEDU53400 seems to seek to restrict the impact of the decision to education. I was pleased to see the FTT in Cheshire apply these principles beyond education, and into welfare.

The Tribunal listed four principles from Brockenhurst, and applied them to the payroll service:

  1. Exempting the payroll service from VAT is consistent with the objective of reducing cost of care and support increasing accessibility to individuals who can benefit therefrom;
  2. The benefits of the services required by the individual's care and support plan would be hindered by the increased cost of incurring VAT on the payroll service; again, the cost of the payroll service comes out of the individual's personal budget;
  3. The payroll service does not constitute an end in itself but is instead a means for better enjoying the services of the personal assistant, which is part of the services required by the individual's care and support plan. Without the engagement of a personal assistant to deliver at least part of the disabled person's care and support needs, there would be no employer role and thus no need to use the payroll service;
  4. the nature and quality of the payroll service is such that, without it, there would be a lesser value to the disabled person of the care and support package; without using the payroll service many disabled persons would have to forego taking a personal assistant (because they could not cope with the employer responsibilities) and that would be to the detriment of the chosen method of delivery of the care and support plan.

In applying these principles, the FTT concluded that the payroll services were closely linked with the welfare services delivered to the recipients, and were therefore exempt from VAT.

Will HMRC appeal?

I fear so. The decision is carefully written with the assumption that it will be challenged. HMRC’s argument based on Brockenhurst states that the payroll service is not indispensable to the recipient, but simply an alternative option, since the recipient could choose to manage direct payments him/herself. Such an argument might be prized wider to support an appeal to the upper tier tribunal.

If HMRC does manage to overturn the decision, it will precipitate moves to increase financial support to recipients of direct payments.

About Les Howard

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Hi, I am a VAT Consultant, working mainly with charities. I am based in Cambridgeshire

I have over 20 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.

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By keithas
17th Jun 2019 14:26

What a complete waste of time and money. Direct Payments are not a fixed sum but assessed annually based on needs - so if the cost of a service increases (e.g. due to VAT being added) then the amount awarded will increase to cover this. So HMRC, if they win an appeal, will increase their receipts by the amount needed to pay the extra Direct Payments.
As for HMRC's argument that "the recipient could choose to manage direct payments him/herself": they've got to be kidding! As a retired accountant with a disabled stepson in receipt of Direct Payments, I can do this, but, even for me, it's quite a challenge.
Here's an example that I had to get a definitive answer from ACAS for: it turns out that anyone with two jobs is entitled to SMP from both employers i.e. double the amount that anyone with a single employer would get. Who'd have thought!?
Another example: holiday pay for employees working variable hours, as most Carers do, has to be constantly recalculated. As I already enter timesheets into Excel to calculate pay, the addition of formula does this for me. Most parents of disabled people have been too busy as carers to learn skills such as Excel.
And the irony of this statement from HMRC, who chose not to update Basic PAYE Tools to include AE, should not be lost on anyone.
As someone who appreciates the financial assistance we get and strives to keep it to a minimum, I chose to do the payroll myself using HMRC's free software. With the introduction of AE, I moved to BrightPay which, at the time was free for up to three employees. BrightPay ceased this concession and I didn't want to migrate again so I decided to pay their small fee. Fortunately, as BrightPay announced in advance their intention to charge, as mentioned before, we included this in our annual assessment and received the funding to cover it.

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