VALUE ADDED TAX – EXEMPTION – health and welfare – outsourced medical care (renal dialysis) – exempt or standard rated – held exempt.

LONDON TRIBUNAL CENTRE

	GAMBRO HOSPAL LIMITED	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

		Tribunal:	RICHARD BARLOW   (Chairman)
				PROFESSOR R SPECTOR  MD PHD FRCP FRCPATH

Sitting in public in London on 29 and 30 March 2004

Mr D Southern of counsel, instructed by Christo & Co, for the Appellant 

Mr R Baldry of counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The appeal.

1.	The appellant is a subsidiary of a Swedish company.  It has been registered for VAT since 1973 and trades as a provider of kidney dialysis and related services.  On 2 October 2002 the commissioners issued a ruling that supplies of haemodialysis services by the appellant to Guys and St Thomas NHS Trust ‘the Trust’) are exempt from VAT.  This followed a ‘voluntary disclosure’ (a claim under section 80(2) of the VAT Act 1994) in which the appellant initially claimed that its supplies were exempt.  On further consideration the appellant’s case has been that its supplies are correctly standard rated.

2.	The appeal relates to the commissioners’ ruling of 2 October 2002 and the consequences of that ruling, if it is correct, are that although the appellant need no longer pay output VAT it cannot reclaim its input VAT and must in effect pass on the input VAT as a cost when charging the Trust.  The contract between the appellant and the Trust that we have seen provides for a fixed fee per patient session exclusive of VAT so it may be that the fixed fee means that the appellant will have to absorb the extra cost, if any, until the contract is re-negotiated, if the commissioners’ ruling is correct.  As an NHS Trust the Guys and St Thomas’s NHS Trust will be able to recover any output VAT charged to it by the appellant under section 41(3) of the VAT Act 1993, so that the imposition of VAT would not adversely affect the Trust as such.  

3.	The appellant’s case is that the ruling that its services constitute exempt supplies is incorrect on the proper interpretation of the relevant provisions and has adverse consequences concerning the non-recovery of its input tax which are contrary to the principles of the tax.

The facts.

4.	The facts are not in dispute.  Alison Thorpe, the appellant’s health care business manager, who is a state registered nurse with a post-registration certificate in nephrology and urology gave evidence in the form of her proof standing as her evidence in chief and was questioned by Mr Rupert Baldry and the tribunal.  Dr Edward Scoble FRCP, consultant nephrologist and former clinical director of nephrology, transplantation and urology at the Trust gave evidence in the same manner.  Needless to say, neither witness was challenged as to the correctness of their evidence and the questions were to elicit further detail.

5.	We find the essential facts to be as follows.  Since about 1960 it has been possible to treat patients with kidney failure by passing their blood through dialysis machines which serve the same function as the kidneys themselves.  The demand for this treatment is very considerable and has increased and continues to increase.  Dialysis is part of a wider system of care and treatment for patients which involves diagnosis; consideration of other treatments including treatment of any other conditions the patient may suffer from; the advisability of dialysis for a particular patient; the prescription of the filters and solutions to be used in the machine and frequent monitoring.  The care of patients with kidney failure is always the responsibility of a specialist consultant and dialysis is carried out under his or her directions by qualified nurses.  The nurses must be holders of post registration certificates in nephrology or be supervised by a holder of that qualification.  The actual treatment usually requires the patient to have undergone some modification of a blood vessel to take the needle used to attach the patient’s blood supply to the machine.

6.	The appellant’s premises at Lewisham were designed and equipped exclusively to provide dialysis treatment and currently the Trust sends patients for treatment under the private finance initiative arrangements by which treatment is ‘outsourced’ from the NHS to specialist units like the appellant’s premises.  The unit is operated by qualified nurses (of whom at least 4 are on duty at any time) and health care assistants.  Treatment is always under the direction of the doctors at the Trust and blood tests are sent back there for analysis.  In the event of a patient suffering an emergency while at the unit an ambulance will be called and the patient will be taken to a local hospital.   

7.	The contractual arrangements between the Trust and the appellant are set out in a detailed written contract dated 19 January 2001.  For a contract price, which is exclusive of VAT, and which provides for a standard charge for each patient session the appellant undertakes to provide haemodialysis services and services ancillary thereto according to specified standards.  The services are further described in detail and include the dialysis treatment as such; provision of the necessary machines and their maintenance; gas, water, electricity and telephones; patient records; waste disposal and patients’ beverages.

8.	The Trust specifically makes no promise that it will send any number of patients and it could stop sending them altogether.  If VAT is chargeable it is provided that it can be added to the price but there is no mechanism in the contract for adjusting the price to take account of irrecoverable input tax if the supplies are exempt.  The contractual period is one year, though it appears the contract has been renewed for several years.

9.	As Mr Southern pointed out, the effect of the contract is that the Trust divests itself of some of the economic risks inherent in providing medical services.  For example, if the demand for dialysis was reduced by new treatments the machines and premises might become obsolete or redundant, operating costs might increase or any number of unexpected contingencies might arise.  For a fixed fee the NHS Trust obtains the treatment for its patients without having to take on these risks.    

The relevant statutory provisions.

10.	Group 7 of Schedule 9 to the VAT Act 1994, so far as is relevant, exempts the following:

“1. The supply of services by a person registered or enrolled in any of the following –

(d) the register of qualified nurses … kept under section 7 of the Nurses, Midwives and Health Visitors Act 1977.

4. The provision of care or medical or surgical treatment and, in connection with it, the supply of any goods in any hospital or state registered institution.

NOTES

(2) Paragraphs (a) to (d) of item 1 … include supplies of services made by a person who is not registered or enrolled in any of the registers or rolls specified in those paragraphs where the services are wholly performed or directly supervised by a person who is so registered or enrolled.

(8) In this group “state regulated” means approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to a provision of a public general Act, other than a provision that is capable of being brought into effect at different times in relation to different Local Authority areas.

Here “Act” means-

(a)	an Act of Parliament,”.

11.	Those provisions are intended to give effect to the following provisions of the EC Sixth VAT Directive:

“13A.
1 Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse:

…
(b)	hospital and medical care and closely related activities undertaken by bodies governed by public law or, under social conditions comparable to those applicable to bodies governed by public law, by hospitals, centres for medical treatment or diagnosis and other duly recognised establishments of a similar nature;

(c)	the provision of medical care in the exercise of the medical and paramedical professions defined by the Member States concerned;.”

The appellant’s contentions in outline.
 
12.	The appellant contends that the provision of the medical treatment relevant to this case is by the Trust and by that body alone.  This is not a supply at all and falls outside the scope of the tax or, as Mr Southern puts it, it is a non-supply.  The supply that the appellant makes to the Trust is not a supply of medical treatment but it is a supply of a package of services which, if a description is needed, is the operation of a hospital, health care establishment, health care facilities and the provision of related services.  It is not supplied in a hospital or state regulated institution.  Further, exemptions cannot be fragmented so that when the Trust out sources some of its services what is outsourced cannot be exempt medical treatment.  Additionally in support of those arguments, the appellant suggests that a wider issue arises namely that it would be contrary to the policy of the tax if outsourcing by public bodies led to their incurring extra costs by having to reimburse the suppliers of the outsourced activities for irrecoverable input tax where the public bodies could recover it if they had not outsourced the activity in question.

The respondents’ contentions in outline.

13.	The respondents contend that the activities of the appellant consist of making composite supplies and that all the activities are within the exemption provided for the provision of medical treatment (item 4) and/or supplies provided under the supervision of qualified nurses (item 1 and note 2).  They contend that the provision of equipment, premises and other related activities are all part of the single composite supplies.  They contend that the care is provided in a hospital and/or a state regulated institution so as to remain within the exemption.  They dispute the appellant’s contention that exempt supplies cannot be fragmented.  They deny the relevance of any wider issue. 

The nature of the appellant’s supplies.

14.	It is not in dispute that the appellant makes supplies under the contract and as those supplies are for a consideration they are supplies of services.  The case is analogous to that of Customs and Excise Commissioners –v- Redrow Group plc [1999] STC 161.  In that case the House of Lords held that the estate agents’ fees that were the subject of Redrow’s claim to deduct input tax represented two different supplies of services.  Redrow received a service consisting of a right to have the home of a potential purchaser of a new Redrow home valued and marketed in accordance with Redrow’s instructions and the potential purchaser received the ordinary services of an estate agent (see per Lord Millett at pages 171j – 172b).  The identity of the person to whom those services were rendered was not in doubt.  What was in doubt until the events unravelled was who was liable to pay for the services.  If the potential purchaser bought a Redrow home Redrow paid, if not, the homeowner paid.

15.	The House of Lords held that two separate supplies were made, one to Redrow and one to the potential purchaser but it did not deal with the question whether both those supplies were supplies of services for VAT purposes.  As only either Redrow or the potential purchaser would pay for the service, not both, it seems clear that the supply to one or the other would not be for a consideration and would not, strictly speaking, be a supply of services for VAT purposes.  Clearly that made no difference in the Redrow case because what was in issue was the input tax only in those cases where a supply had been made to Redrow for a consideration.

16.	The present case has some similarities to Redrow.  The appellant clearly makes some supplies to the Trust which consist of supplying the services required by the contract and they are supplied for a consideration.  It could be said that they consist of making supplies to the patients as directed by the NHS Trust, just as the agents made supplies to Redrow by valuing and selling the potential purchasers’ properties on Redrow’s instructions.  It could be said that the appellant also makes supplies to the patients, which are analogous to the supplies made to the homeowners in Redrow, although in this case as the patients will never have to pay the appellant for those supplies, the question arises whether they could become supplies of services to the patients for VAT purposes.  The supplies to the patients are made for a consideration and the only special feature of those supplies is that the consideration comes from a third party, the Trust.  That is provided for by article 11A(1)(a) of the EC Sixth Directive and so it is clear that any supply to the patients can in principle still be a taxable supply of services even though the patients do not pay for the treatment.

17.	The difficulty with the analogy with the Redrow case is that in that case either the potential purchaser or Redrow paid for what the House of Lords held to be a different supply so that the input tax question, which was the issue in that case, did not arise where the supply was to the potential purchaser.  That case did not directly address the issue of what, if any, output supplies were made to the potential purchasers in the case where Redrow paid the agents or to Redrow where the potential purchasers paid the agents.  The present case is different in that the appellant is paid the same amount whether the correct analysis is that it makes a supply to the patient that is paid for by the Trust or it makes a supply to the Trust, or both.

18.	Bearing in mind that the House of Lords held that the supply to Redrow was a supply of a right to have its potential customers represented by the agents and that that was different from the supply to the potential purchasers where the agents represented them directly, it could be argued that the supplies to the Trust by the appellant were supplies of a right to have its patients treated and that that is different from the supply to the patients when they are treated.  That is indeed the appellant’s argument.  Mr Southern relied in particular on the transfer of risk, already referred to in paragraph 9 above, in support of the argument that the supply to the NHS Trust was not a supply of medical services because that transfer of risks has nothing to do with the actual treatment of patients.  He argued that the supply consisted of the operation of a hospital, health care establishment and health care facilities and the provision of related facilities, which is a category of activities listed in the Treasury Direction made for the purposes of section 41(3) of the VAT Act 1994.          

19.	If the arrangements between the Trust and the appellant had been that the Trust would pay separately both for the setting up of the clinic at Lewisham and its equipment and running (say by a lump sum) and for the treatment of the patients (say at so much per session), that argument might be very persuasive. However in this case the payment is made exclusively and specifically for each patient session.  As that is the only payment under the contract, it follows inevitably that from the VAT point of view we have to ask the question what was that payment for because it is only services provided for a consideration that can amount to a supply or supplies.  The payment therefore limits the scope of possible supplies and that scope is whatever the payments are for.

Composite or multiple supplies?

20.	Identifying the scope of the supplies is only the first step because, although the payment of consideration circumscribes the possible supplies, it may be a payment for a single composite supply or series of composite supplies or it may be for multiple supplies.
  
21.	In this context Mr Baldry relied upon Card Protection Plan Ltd –v- Customs and Excise Commissioners [1999] STC 270.  He argued that the Court of Justice of the European communities (the ECJ) had established the following as the correct approach and he relied in particular on page 293 a-h.  We agree with his contention in this respect.  The transaction must be examined having regard to all the circumstances in which it takes place and by ascertaining the essential features of the service.  Every supply of a service must normally be considered as distinct but a supply that comprises a single supply from an economic point of view should not be artificially split.  There is a single supply where one or more elements constitute the principal service and others are ancillary to it and an element must be regarded as ancillary if it does not constitute an aim in itself but a better means of enjoying the principal service.  The charge of a single price is not decisive but may suggest there is a single service.

22.	Our conclusion is that there is a single composite supply each time a patient is treated.  The single price is indicative of that though not conclusive.  We find that the essential features of the services supplied by the appellant are the treatment of patients and in particular the provision of premises, equipment and qualified staff are part of that single service.  Treatment of patients will always require the provision of premises, equipment and qualified staff and it follows that those activities of the appellant are part of the essential features of the service.

23.	It makes no difference whether the correct analysis is that the supply was to the patients paid for by a third party or to the Trust.  There is only one relevant supply or series of supplies and it is, or they are, the supplies provided for by the contract and for which the flat rate of payment provided by the contract was paid.

24.	Our conclusion is therefore that the supplies, or at least the only supplies for VAT purposes, consist of the provision of dialysis treatment and services ancillary thereto which are composite supplies for VAT purposes.

Categorisation of the supplies.

25.	That conclusion does not of itself decide whether the supplies in this case are standard rated or exempt.  That depends upon the interpretation of the exempting provisions.  We remind ourselves that they should be construed strictly.

26.	We have held that it makes no difference to the question whether there is a single composite supply whether the supply is to the Trust or to the patient but paid for by the Trust.  That question may still be relevant to the categorisation of the supply.

27.	The appellant argues that the supply is to the Trust; at least it is inherent in its argument that the Trust should be able to recover its input tax that this is so and we agree.  Indeed Customs and Excise also agreed that the supplies are to the Trust.

28.	Item 4 of Group 7 of Schedule 9 to the VAT Act 1994 is not worded in such a way as to suggest that the identity of the recipient of the supply is of the essence.  The provision of care or medical or surgical treatment will of course always be to a natural person but that does not mean that, from the VAT point of view, the supply cannot be to a legal person.  For example a self employed consultant may well supply his services to a hospital for VAT purposes rather than to an individual but those services will still consist of the care of natural persons.  We did not understand Mr Southern to have argued to the contrary.  His argument was that the supply of services took on an altogether different character from that of the supply of care or medical services for the reasons summarised in paragraph 18 above.  We do not agree.  The fact that the operations of the appellant could be said to include those described in the Treasury Direction does not mean that they must be so characterised.  The fact is that the essence of what is supplied is treatment, not the operation of a hospital.  The acceptance of economic risk is not the essence of the supplies made by the appellant and is at best a better means for the Trust to enjoy the services supplied under the contract to the Trust.   

29.	For the same reasons that we have concluded that there is a composite supply we hold that the supplies are supplies of care and medical treatment.  That is their predominant characteristic.  No supply took place when the clinic was built, staffed and equipped.  Supplies only began when patients were referred.  The essence of the supply is the treatment of patients.

30.	Our conclusion is that the supplies of care and treatment are made by the appellant.  It is true that the Trust is under an obligation to provide care and medical treatment.  Mr Southern argued that it has a non-delegable statutory responsibility to provide it and we agree that that is correct.  However, he also conceded that the obligation can be satisfied by securing that third parties provide the care or treatment.  The existence of outsourcing arrangements confirms that that is so.  It therefore follows that it is not correct to argue that from the VAT point of view supplies of medical care and treatment paid for by the national health service can only be made by NHS Trusts or other public bodies.  It also follows that it is incorrect to argue that therefore what the appellant does cannot be the provision of medical care.  

31.	We have to look at what the appellant was doing and determine its correct classification.

32.	The exemption under item 4 requires that the care or medical treatment must be in a hospital or state regulated institution.  Although Mr Southern accepted that the clinic is state regulated he contended that it is not a hospital or an institution.  He argued that an institution must have autonomy, continuity, a public purpose, have the quality of being established and not be limited to a temporary or technical purpose.  This was derived from the Shorter Oxford Dictionary.  He supported his argument with reference to Gregg –v- Commissioners of Customs and Excise [1999] STC 934 in which the ECJ held that “establishments” in art 13A(1)(b), which is the provision transposed by item 4, can include natural persons.  In particular our attention was drawn to paragraph 27 of Advocate General Cosmas’s opinion in which he said that an establishment would have to be an autonomous operator.  Mr Southern said that the degree of control by the Trust was such that the appellant’s premises in Lewisham were not those of an autonomous operator.  We find that the appellant does operate an institution giving that word its normal meaning.    

33.	We also regard the fact that item 4 is transposing art 13A(1)(b) as grounds for giving the word institution a wide meaning.  Art 13A uses the following wording: “ … hospitals, centres for medical treatment or diagnosis and other duly recognised establishments of a similar nature”.  In order to transpose that phrase into UK legislation, which only refers to hospitals and institutions, it is necessary to give a wide meaning to “institution” in the UK legislation because otherwise the reference to “establishments of a similar nature” is not catered for.

34.	We also hold that the Lewisham premises are a hospital.  The fact that patients are treated in reclining chairs and do not stay over night does not prevent the organisation from being a hospital.  It is set up exclusively to provide specialist treatment and is in our view a hospital in the ordinary sense of that word.     

35.	We also hold that the services supplied fall within item 1(d), as extended by note 2.  It is only implied, but the implication is clear, that the supply of services by registered persons must be services supplied by them in that capacity but that is what occurs in this case.  The evidence is unequivocal.  Provided the supplies are made by the appellant, which we have held they are, they are performed by nurses registered under the 1997 Act or at least supervised by such nurses.

36.	It follows that we hold that the supplies in question are exempt.

The non-fragmentation argument.

37.	Mr Southern referred to Sparkassernes Datacenter –v- Skatteministeriet [1997] STC 932 (‘SDC’).  In that case several Danish banks had outsourced some operations that would otherwise have been conducted in-house by each bank separately and which would, at least if kept in-house, have constituted activities related to the banks’ exempt transactions.  The ECJ held, at paragraphs 60, 65 and 66 of its judgment that the mere fact that a service is a constituent element essential for completing an exempt transaction is not enough to make it exempt when it is carried out separately.  In particular the ECJ said

“66. In order to be characterised as exempt transactions for the purposes of points (3) and (5) of Art 13B, the services provided by a data-handling centre must, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a service described in those two points.”

Mr Southern argued that that amounted to establishing a rule that it is only where an entire exempt supply is outsourced that what is then supplied to the person who outsourced it will remain exempt.

38.	We point out that although the word outsourcing may suggest that the person who out sources has disposed of something that he then buys back, either in full or in part, that is not actually what happens.  Outsourcing actually means that the person concerned buys in goods or services that he might otherwise have provided for himself but he in no way supplies the goods or services to anyone else first and then buys them back.  

39.	The banks in SDC bought services from SDC and the only question the ECJ had to decide was whether those services supplied by SDC fell within the exempting provisions.  In order to be exempt what the banks bought from SDC had to have all the necessary characteristics of an exempt supply and it was not enough to give them exempt status that the banks might have carried them out in-house as part of their exempt activities.  The court did not hold that it was impossible for the banks to buy in exempt supplies without buying in the full package of exempt supplies they might otherwise have carried out themselves.  The court did not say that exempt services cannot be fragmented.  We agree with Mr Baldry that the appellant’s argument in this respect is incorrect.  

40.	Putting that in the context of this case, if what the Trust buys from the appellant has all the necessary characteristics of an exempt supply it is still an exempt supply even if the Trust is also still carrying out some of the care and treatment of the patients.

41.	We therefore reject the argument that the Trust cannot have bought-in an exempt supply from the appellant for its patients without having first ceased to make any exempt supplies itself for those patients.

The broader picture.

42.	Mr Southern argued that the interpretation of the legislation contended for by Customs and Excise, and now accepted by us, cannot be correct in light of the intentions behind the legislation and that accordingly it should be rejected.

43.	It is true that the appellant may seek to increase its charges to the Trust to take account of the fact that there will be irrecoverable input tax which, if its supplies had been taxable, it could have passed on with impunity as output tax because the Trust could recover, as its input tax, the output tax charged to it.  It is also possible to argue that the result is that the Treasury will be slightly better off than it might have been but that it will have to fund the Trust to a greater and equal extent.  This is what Mr Southern called a pointless recycling of tax.

44.	Even if that is so we do not regard it as an argument that would entitle us to misinterpret the legislation.     

Conclusion.

45.	We dismiss the appeal.  Mr Baldry did not seek an order for costs and there will be no order.

RICHARD BARLOW
CHAIRMAN

RELEASED:

LON/03/0206