Policy paper

Revenue and Customs Brief 9 (2021): VAT liability of daycare services supplied by private bodies in England and Wales

Published 11 June 2021

Purpose of this brief

This brief explains HMRC’s position following the judgment of the Court of Appeal in the joint appeals of LIFE Services Ltd and The Learning Centre (Romford) Ltd and the Supreme Court’s decision to refuse leave to appeal on 15 January 2021.

The cases concerned the VAT liability of daycare services provided by private bodies to vulnerable adults in England. The earlier decisions of the Upper Tribunal were affirmed in both cases.

This confirms that HMRC’s view of what the legislation means is correct. Providers must be charities, public bodies or regulated by the relevant authority in the country concerned, in order to be able to exempt their supply of services.

Who needs to read this

This brief applies to:

• organisations that supply daycare services in England and Wales (and their advisers)
• businesses with appeals claiming their supply of daycare services are exempt, where the appeals were stood behind the appeals by LIFE Services Ltd and The Learning Centre (Romford) Ltd

Background to the Court of Appeal’s judgment

The supply of welfare services by a charity, or a state-regulated private welfare institution or agency, is exempt from VAT under Item 9 of Group 7 of Schedule 9 to the VAT Act 1994.

The provision of welfare services by private bodies that are not charities is only exempt from VAT if the body concerned is a state-regulated, private welfare institution or agency. Note (8) to Group 7 of Schedule 9 to the VAT Act 1994 defines ‘state-regulated’, as ‘approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to a provision of a public general Act’.

LIFE Services Ltd provided services to individuals under a formal care plan agreed with the local authority, following an assessment of the individual’s needs and the setting of a personal budget for care and support. The local authority made payments either directly to LIFE Services Ltd, or indirectly, where the individual or carer was managing the budget. The local authority monitored and inspected the daycare service. It was not regulated by the Care Quality Commission.

The Learning Centre (Romford) Ltd accepted individuals who had already been assessed by their local authority and had a care plan. Most of its fees came from the local authorities, with parents or carers providing some funding. Its services were not regulated by the Care Quality Commission.

Tribunal decisions

HMRC maintained that the services were subject to VAT at the standard rate, whereas LIFE Services Ltd and The Learning Centre (Romford) Ltd contended that they were exempt. The First-tier Tribunal allowed both appeals. However, the Upper Tribunal decided that:

• LIFE Services Ltd was not a state-regulated, private welfare institution or agency

• in both cases, item 9 of Group 7 of Schedule 9 to the VAT Act 1994 did comply with the requirements of fiscal neutrality - in doing so, the Upper Tribunal also decided that devolution arrangements did not mean that item 9 of Group 7 breached the principle of fiscal neutrality

Both LIFE Services Ltd and The Learning Centre (Romford) Ltd appealed.

The Court of Appeal’s judgment

On the status of LIFE Services Ltd

With regard to whether LIFE Services Ltd is a ‘state-regulated private welfare institution or agency’ as defined within item 9 of Group 7 of Schedule 9 to the VAT Act 1994, the Court of Appeal held that:

• what is required is that the institution or agency is ‘approved, licensed, registered or exempted from registration in respect of the supply of welfare services by any Minister or other authority pursuant to a provision of a public general Act’
• the various provisions of law relied on by LIFE Services Ltd are insufficient to satisfy that test, so do not meet the condition

On the principle of fiscal neutrality

Both LIFE Services Ltd and The Learning Centre (Romford) Ltd contended that item 9 of Group 7 of Schedule 9 to the VAT Act 1994 contravened the principle of fiscal neutrality, because it:

1. Imposes a differential VAT treatment between charities and other private operators.

2. Entitles charities to exemption whether or not they are devoted to social wellbeing.

3. Causes differential treatment of providers of daycare services between those in England and Wales who are not subject to state regulation and those in Scotland and Northern Ireland who are.

The Court of Appeal held that:

With regard to point 1, there is no breach of the principle because item 9 distinguishes between private welfare bodies that are subject to some form of regulation and those that are not. Charities are not ‘state-regulated’ but are required to be established solely for charitable purposes that are for the public benefit and are subject to supervision by the Charity Commission. The average consumer would see little relevant difference between services provided by charities and those provided by state-regulated private providers.

With regard to point 2, there is no breach because it is implicit that the exemption only applies to charities who supply welfare services in accordance with the specific charitable purposes specified in their constitutions.

With regard to point 3, there is no breach because item 9 does not itself discriminate between private welfare providers located in the different nations of the UK. It only discriminates between state-regulated providers and non-state-regulated providers. The reason why certain providers do not qualify as being ‘state-regulated’ is immaterial.

The court concluded that the services did not meet the terms of Item 9 of Group 7 and article 132(1)(g) of the Principal VAT Directive.

The judgment is reported at 2020 EWCA Civ 452.

Appeals stood behind LIFE Services Ltd Services and the Learning Centre (Romford) Ltd

HMRC will now write to other appellants asking them whether they intend to proceed with their appeals, given the Court of Appeal’s judgment.

Providers of daycare services in England and Wales who are not charities

Providers who have not accounted for VAT on supply of these services must do so with immediate effect. Providers who have not accounted for tax correctly in the past must follow the guidance in Correct errors on your VAT Returns.

This case has no impact on providers of daycare services in Scotland and Northern Ireland. They are still required to be state-regulated and will continue to benefit from the exemption as long as they are state-regulated.

More information

For more information on VAT, contact the VAT helpline.