TC09680 - [2025] UKFTT 01332 (TC)

Under the principle of fiscal neutrality, goods and services which are “similar” from the point of view of a typical consumer, avoiding artificial distinctions based on insignificant differences, should be treated the same way for VAT purposes.

In LIFES the Court of Appeal considered fiscal neutrality in the context of Item 9. I set out the relevant passage below, before discussing it:

“Case law of the Court of Justice concerning Article 13A(1)(g)

[39] The Court of Justice has considered Article 13A(1)(g) of the Sixth VAT Directive in a number of cases. The Court's case law establishes the following propositions.

[40] First, the objective pursued by Article 13A(1)(g) is to reduce the cost of welfare services and to make them more accessible to the individuals who may benefit from them: Case C-498/03 Kingscrest Associates Ltd v HMRC [2005] ECR I-4427; [2005] STC 1547 at [30].

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[44] Fifthly, in order to determine the organisations which should be recognised as ‘charitable’ for the purposes of Article 13A(1)(g), it is for the national authorities, in accordance with EU law and subject to review by the national courts, to take into account, in particular, the existence of specific provisions, be they national or regional, legislative or administrative, or tax or social security provisions; the public interest nature of the activities of the taxable person concerned; the fact that other taxable persons carrying on the same activities already enjoy similar recognition; and the fact that the costs of the supplies in question may be largely met by health insurance schemes or other social security bodies: Case C-141/00 Ambulanter Pflegedienst Kügler GmbH v Finanzamt für Körperschaften I in Berlin [2002] ECR I-6833 at [57]-[58]; Kingscrest at [53]; and Finanzamt Steglitz v Zimmerman EU:C:2012:716; [2016] STC 2104 at [31].

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[48] Ninthly, compliance with the principle of fiscal neutrality requires, in principle, that all the organisations other than those governed by public law be placed on an equal footing for the purposes of their recognition for the supply of similar services: Zimmerman at [43].

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[67] The UT held in UT2 at [59] that this quartet of cases showed that, ‘although in general the consumer is not interested in the regulatory regime which governs a supplier of services, there can be particular contexts where the regulatory framework or legal regime governing the supplies in question may create a distinction in the eyes of the consumer’. Counsel for LIFE did not take issue with this statement of principle, although he stressed the CJEU's statement in Rank [2011] ECR I-10947; [2012] STC 23 at [50] that such cases are ‘exceptional’.

[68 ] The UT went on at [60]:

‘We accept that in the case of welfare services, which are necessarily personal, services provided by regulated providers are of their nature different from services provided by unregulated providers, because the system of regulation provides a system of protections and guarantees which is absent in the case of unregulated services. We therefore consider that the UT in the first appeal in the LIFE case was right to say that providers such as LIFE (and TLC) cannot be equated with regulated providers. This is so even though (i) they may in fact be providing similar services to those that would be provided in Scotland and Northern Ireland by regulated bodies; and (ii) they in fact provide services to the same standard of care as would be required if they were regulated. They are not subject to the same level of state supervision. Nor is it an answer to say that the local authorities (Havering and Gloucestershire) with whom they respectively deal inspect and monitor the quality of service. This is no more than one would expect a responsible local authority to do, but this cannot be regarded as the equivalent of a statutory system of regulation.’

Point (i) relates to LIFE's third submission which is considered below.

[69] Neither of the criticisms which counsel for LIFE made of the UT's reasoning in UT1 applies to this reasoning. Although the UT did not use the word ‘consumer’ in [60], it is clear from what the UT had said in [59] that it was considering the matter from the perspective of the consumer.

[70] Counsel for LIFE submitted that this assessment was not open to the UT because there was no evidence to support it. There is no indication in any of the judgments of the CJEU in this field, however, that a national court requires evidence such as a consumer survey or expert report in order to determine whether services are regarded as similar by consumers for these purposes. While the case law does not rule out such evidence being admitted in cases of difficulty, it is clear that in most cases the national court is expected to make an assessment using its own experience of the world.

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LIFE's third submission and TLC's contention

[90] LIFE’s third submission, and TLC’s contention, is that Item 9 contravenes the principle of fiscal neutrality because of the differential treatment of providers of day care services in England and Wales on the one hand and providers of day care services in Scotland and Northern Ireland. This is because the provision of such services is a devolved matter under the United Kingdom’s devolution arrangements. As discussed above, in England the provision of day care services is not ‘state-regulated’, and in particular, it is not regulated by the CQC under HSCA 2008. The position is the same in Wales. It is common ground that, by contrast, the provision of day care services in Scotland and Northern Ireland is ‘state-regulated’ by virtue of legislation passed by the devolved administrations in April 2002 and 2005 respectively. Accordingly, LIFE and TLC contend that there is a contravention of the principle of fiscal neutrality because day care providers in Scotland and Northern Ireland benefit from the exemption whereas day care providers in England and Wales do not.

[91] The UT rejected this contention in UT2 [2017] UKUT 484 (TCC)] at [48] for the following reasons:

‘It is accepted that the UK had a discretion. It is accepted, or has already been found, that the way in which it exercised that discretion in 2002 was rational and lawful. We see no basis on which it could be said that as introduced in 2002 it breached the principle of fiscal neutrality as it applied uniformly across the UK to all private suppliers of welfare services. To the extent that there is now a difference between such suppliers in England and Wales on the one hand, and Scotland and Northern Ireland on the other hand, this is not caused by any lack of neutrality in the VAT legislation, but by the fact that the UK has devolved regulation of this sector to the devolved nations and they have made different decisions in that respect, as they are entitled to do.’

[92] Counsel for LIFE submitted that this reasoning was wrong in law for two reasons. One of these I have already considered and rejected, namely that the UT was wrong to conclude that ‘state-regulated’ private providers were not similar to non-state regulated private providers. The other reason advanced by counsel for LIFE was that the UT was wrong to focus exclusively on the effect of the VAT legislation. The UK, he submitted, was required by the principle of fiscal neutrality to ensure that similar services were accorded similar VAT treatment throughout the UK. In the present case the combined effect of the UK VAT legislation and the Scottish and Northern Irish regulatory regimes meant that similar services were treated differently.

[93] I do not accept this submission. In my view the UT was correct to say that Item 9 does not discriminate between private welfare providers located in the different nations of the UK. It does discriminate between state-regulated providers and non-state regulated providers, but for the reasons given above that does not contravene the principle of fiscal neutrality. Given that it is not a breach of that principle to deny the benefit of the exemption to non-state regulated providers, the reason why certain providers do not qualify as being ‘state-regulated’ is immaterial. Whether it is because they are located in a nation which does not regulate day care services, or for some other reason, the result is the same, namely that they are perceived by consumers as significantly differently to state-regulated providers.

[94] Counsel for TLC supported the submissions of counsel for LIFE. He also made a number of other submissions which do not take matters further. It is only necessary to mention two of these. First, counsel for TLC placed considerable emphasis on the legislative history which the UT summarised in UT2 at [32]. As the UT rightly held, however, this is of little assistance in determining whether or not the current legislation breaches the principle of fiscal neutrality. Secondly, counsel for TLC complained that the UT had not considered the reasoning of the FTT in FTT2 [2017] UKFTT 492 (TC) or explicitly identified any error of law in that reasoning. There is nothing in this point. The issue before the UT was a question of law. In reaching a different conclusion to the FTT, the UT necessarily concluded that the FTT had erred in law.

[95] Before leaving this issue, I should record for completeness that HMRC did not pursue on the appeal to this Court a contention which they had advanced before the UT to the effect that it is permissible under EU law for Member States to give effect to EU law (or at least art 132(1)(g)) in a different manner in different regions (be they units of a federal state such as Germany or the devolved nations of a country like the UK). Accordingly, it is unnecessary to consider what the CJEU meant by saying that national authorities were entitled to take into account ‘regional’ legislation (see para [44] above).”

It is apparent to me that, when considering whether services are state regulated at [92] to [93], the Court of Appeal is considering whether that service is as a matter of fact regulated by the state (be it at a national, regional or local level) rather than whether services fall within the definition in Note 8. This is because it is self-evident that a typical consumer would not have any awareness of Schedule 9. They would be far more likely to be aware of whether a service is in fact regulated. It is also apparent from the Court of Appeal’s earlier discussion of the UT decision which references “system of protections and guarantees which is absent in the case of unregulated services.”

Applying the Court of Appeal’s reasoning, and my “own experience of the world”, I consider that a typical consumer would regard services regulated by CIW as similar to the provision of the same support regulated by an act of any of the legislatures expressly mentioned in Note 8.

In reaching this view, I accept Cascade’s submission that the precise nature of the regulation differs between the constituent parts of the UK. The only evidence I was referred to on this point is the Memorandum of Understanding: Systems regulators for the four nations (29 June 2024). However from that it is apparent that across all four nations a regulatory objective is “regulatory assurance system for all services of a mutual interest operating in the UK, which promotes patient and social care service user safety and high-quality care”. This demonstrates the “system of protections and guarantees” referred to by the UT in LIFES as the characteristic of state regulated care. Cascade have not highlighted any particular features of regulatory difference which would mean that a typical consumer would not regard services regulated by CIW as similar to the provision of the same support regulated by an act of any of the legislatures expressly mentioned in Note 8.

I agree with Cascade that this is the proper comparison, not with whether Cascade’s services were exempt prior to being regulated by CIW. This is because fiscal neutrality applies to services that are in competition with each other: Rank at [32].

Cascade have observed that HMRC have previously argued that there is no breach of fiscal neutrality merely because the UK gives effect to EU law differently in its different constituent parts. This contention was left open by the UT in LIFES. However, beyond that, before me Cascade has put forward no argument on this point. Even if it is open to the UK to give effect to EU law differently in its different constituent parts (on which I express no view) Cascade have not set out a positive case as to why it should be so in this case.

It follows that I accept that, if the effect of Note 8 is that Cascade’s services that are regulated by CIW are not exempt, there is a breach of EU law. In those circumstances I now consider whether a conforming interpretation is possible.