VATWELF3025 - Welfare services: VAT liability of payroll services following the decision by the Cheshire Centre for Independent Living (‘Cheshire’) to concede its appeal in the Upper Tribunal.
The Upper Tribunal has set aside the decision of the First-tier Tribunal in the above appeal. There is no change to HMRC’s position which was that the appeal was wrongly decided on the grounds decided by the First-tier Tribunal.
The case concerned the VAT liability of payroll services provided to disabled persons to enable them to employ a personal assistant to help them to live independently in their own homes. The issue was whether this was a service directly connected with the provision of care and therefore exempt.
The Appellant was a charity that provided a range of support services for disabled people, one of which was a payroll service. The disabled persons received direct payments from the local authority to enable them to employ a personal assistant.
There are various legal and administrative requirements for the employment and this includes payroll services, such as:
calculating wages
deducting PAYE and NICs
registration and filing with HMRC
auto enrolment for pension contributions and redundancy
sick and holiday payment calculations
Cheshire entered into contractual arrangements with the disabled persons to provide these payroll services.
HMRC’s view was that the payroll service did not qualify as a service directly connected with welfare under Item 9 of Group 7 and was therefore standard rated for VAT.
The First-tier Tribunal allowed Cheshire’s appeal on the grounds that exemption was consistent with the objective of reducing the cost of care and increasing its accessibility to the individuals involved. It held that the service was ancillary to the care and support provided by the personal assistant and was essential to the latter service.
It concluded the service was therefore exempt. The decision is reported at [2019] UKFTT 354 (TC).
HMRC’s position was that the First-tier Tribunal erred in law because the decision did not take full account of the tests laid down in Diagnostiko & Therapeftiko Kentro Athinon-Ygeia AE (Joined Cases C-394/04 and C-395/04). These included a requirement that to be exempt from VAT the services had to be ‘logically part of, or an indispensable stage’ in the provision of the general care and domestic help provided to the disabled person. HMRC considers that test was not met.
However, a further ground was accepted by Cheshire. The further ground was that the payroll service could not be ancillary to the care provided to the disabled individuals, since an ancillary service can only be exempt if it is ancillary to a principal exempt service.
The personal assistants were employed by the disabled individuals in question and so the care they provided was under a contract of employment which was outside of the scope of VAT and could not be an exempt supply. The supply of payroll services could not therefore be exempted because it was ancillary to a non-exempt service and did not meet one of the preconditions for being a supply closely linked to welfare.
There is no change to HMRC’s policy which is that these payroll services are not exempt welfare services. The guidance on direct payment services in paragraph 5 of VAT notice 701/2 Welfare Services and Goods refers to exempt welfare services provided to the recipient of care. The payroll services are not covered by this guidance.
The effect of Cheshire’s withdrawal of its appeal in the Upper Tribunal is that the First-tier Tribunal’s decision was overturned. With the consent of the parties, the Upper Tribunal ordered that the substantive decision be set aside and remade. It will not now be reheard by the First-tier Tribunal.
As a result of the Upper Tribunal’s setting aside of the First-tier Tribunal decision, it is not possible to rely on that decision as determinative. HMRC’s policy remains as set out above, and cases for claims to exemption where the facts are materially similar to those in the Cheshire case will be rejected.