[2010] UKFTT 123 (TC)

								TC00434

Appeal number LON/2008/2352

Value Added Tax  -  whether the Appellant rendered one composite service, or two or more distinct services  -   whether the service, if one composite service, was of medical services  -   whether the Appellant company was treated, by Note 2 to Group 9 of Schedule 5 to VAT Act 1994, as being amongst the category of persons whose medical services might rank as exempt services  -  complaints about misdirection by HMRC officers  -  Appeal allowed

FIRST-TIER TRIBUNAL
TAX CHAMBER

	HEALTH RESPONSE UK	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Value Added Tax)	Respondents

				TRIBUNAL: 	 JUDGE HOWARD NOWLAN
						 GEORGE BARDWELL

Sitting in public in London on 18 and 19 November 2009

Janice Kaye, managing director of Health Response UK Limited, for the Appellant 

David Yates, counsel, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction

1.     This was a relatively complicated and confused case, in part because of the way in which it was presented. 

2.     It related to the appropriate treatment of the Appellant’s trade, which involved two essential attributes.  The first was to arrange very swift and appropriate treatments for client companies when one of their employees sustained some musculoskeletal injury.   The second aspect of the service was to understand clients’ businesses, either on a site-by-site basis, or by reference to the different activities performed by employees, so as to provide collated information about injuries sustained by all employees.  The purpose of this was to enable companies, sometimes actively assisted in this role by the Appellant, to locate risk areas in their businesses so that they could reduce the risks of injury, and reduce the attendant lost working time.

3.    The osteopaths, chiropractors and physiotherapists (“registered practitioners”) who actually gave the treatments were all sub-contracted to the Appellant, rather than employed by it.   It was however clear that the Appellant’s service encompassed the giving of services by those sub-contractors, and it was not just operating as an agent to book appointments on behalf of clients.

4.    The VAT dispute revolved around whether the Appellant’s trade was standard rated, or whether, as a supplier of exempt medical supplies, it was rendering exempt supplies.   The Appellant had initially proceeded, somewhat encouraged in this regard by HMRC, to treat all its services as standard rated.  Ignoring at this point the intermediate decisions and directions, HMRC’s eventual contention was that the bulk of the services were exempt services.  Although this meant that the VAT inclusive charges against customers had been higher than they would have been had the services been treated as exempt, it did of course follow that clients had the benefit of an input deduction for the VAT element.  The consequence of the contention in this appeal by HMRC was that much of the Appellant’s own input tax should have been disallowed, as “stranded” VAT, because, on HMRC’s view, the vast majority of the Appellant’s services were exempt supplies.  Accordingly in two separate assessments, HMRC was assessing the Appellant for approximately £60,000, to recover the input deductions, claimed to have been wrongly given. 
  
5.    From a VAT perspective, the case involved the difficult and fairly familiar question of whether the Appellant was rendering one composite service, or two or more separate services, each of which might have its own distinct nature, as standard rated or exempt for VAT purposes.   It also involved the less common question geared to the fact that medical services are only exempt when actually rendered (in the present context) by registered osteopaths, chiropractors or physiotherapists, or by a company wholly providing the services of such registered practitioners, or by a company whose services were wholly supervised by such practitioners.  Had we concluded that the company rendered two distinct services, in firstly providing the services of registered practitioners, and secondly providing the information to assist client companies to reduce the injury risk areas in their businesses, this further question would have been simple.  The medical services would have been wholly supplied by registered practitioners, and would have been exempt.  The complex collated reporting services would have been standard rated, either because they would not have ranked as an exempt medical service, or because the company would have rendered that service entirely, or at least largely, through the efforts of non-registered practitioners. On the basis of our decision that it is appropriate, albeit without considerable thought having had to be given to a difficult issue, to treat there as being just one composite service, we have to decide how then to apply the rule that when the service is rendered by a company, and only some of the overall services are rendered by registered practitioners, and others by non-registered practitioners, we apply the rule that the services will only be exempt if “wholly performed” by registered practitioners. HMRC’s case was that the medical element of the one composite service was rendered by registered practitioners, and that the other element should take its VAT nature from the principal medical service, such that it should also be ranked as part of the overall exempt service, even though it was almost entirely rendered by non-registered practitioners.  

6.     Our decision is that that approach just referred to is wrong.   We decide that once we treat the Appellant’s service as one single service, and once it is manifest that only a part of that service is rendered by registered practitioners, and part is not, then the service does not qualify as an exempt medical service.  

7.    The major respect in which this case was complex and confused was that, because the case was presented by its non-legally-qualified managing director, and since HMRC had paid no regard to the issue about the company’s services needing to be wholly performed by registered practitioners during the period of the dispute and during the hearing, there was virtually no discussion in the hearing in relation to the point on which we have based our decision.  Admittedly this issue has been ventilated since the hearing, following directions that we issued for further information.

8.       Our decision in this appeal may be a mixed blessing for the Appellant because although we were told that the Appellant would find it extremely difficult to pay the tax in dispute, were the appeal to be dismissed, the Appellant was also keen to achieve finality to a very long-running dispute, and there must be some possibility, should the Respondents appeal against our decision, that finality will not be achieved by our decision. 

9.    The case was also somewhat dominated by emotion in that Janice Kaye, the managing director of the Appellant, felt extremely aggrieved by several aspects of the past conduct of HMRC, and aggrieved at the invidious position in which her company was now placed, and at the damage done to her own health by the very protracted dispute.   At the date of the hearing, we were informed firmly by counsel for HMRC that we had no jurisdiction to hear any contention along the lines that the Respondents had misdirected the Appellant on several occasions in the past, and naturally at the time, before the obiter remarks by Mr. Justice Sales in Oxfam v. HMRC [2009] EHWC 3078 (Ch), we assumed that this was correct.  Whilst we intimated that we would make some comments in our decision, recording the manner in which HMRC officers had hardly excelled themselves, it did follow that during the hearing we gave no real attention to the misdirection point.  Accordingly, and because the Oxfam point about our jurisdiction remains an open question at this time, and we have decided to allow the appeal on other grounds in any event, it would be inappropriate to do more than simply summarise (in recording the facts in more detail) the unsatisfactory way in which the correct treatment of the Appellant’s services were analysed from time to time.  We will also add that Janice Kaye was particularly aggrieved by this history.     This somewhat understandable grievance, and the resultant fact that she had suffered ill health and depression during the dispute and considerable depression during the hearing, and that much of her focus was on her perceived ill-treatment rather than the legal issues (as to which she was naturally less familiar), did make it more difficult than usual to give our attention to the issues that were properly before us. 

The evidence

10.     The case for the Appellant was almost entirely conducted by Janice Kaye, who also gave evidence on oath.    Evidence was also given by Melanie Sheen, one of the senior employees of the Appellant, and by two senior representatives of two of the main clients of the Appellant, namely by Andrew Collinson, Operations Director of British Polythene Industries Plc, and by Velma Baptiste-Destouche, Vice President of Health, Safety and the Environment and Quality for Mainland Europe, DHL Exel Supply Chain.  Both Andrew Collinson and Velma Baptiste-Destouche had in fact moved to different positions in their respective companies from the positions held when they had had major dealings with the Appellant, though this had no bearing on the relevance of their evidence. 

The facts
Background
11.     The Appellant company was formed by Janice Kaye in 1999.    She herself had had years of experience in relation to musculoskeletal complaints, and she was very aware of the respect in which such complaints (particularly back problems) resulted in countless loss of days for British industry.   
 
12.    Musculoskeletal complaints pose problems for industry in various ways, and account for a high proportion of days lost to industry.   One recurrent problem area is that many people who suffer such complaints, either at work or not at work, will often contact their GP, and if it takes them some time to get an appointment, and the GP then gives them a "sick note" putting them off work for a week, the patient can easily lose two weeks from work. This is commonly what happens if the "sufferer" approaches his or her GP, and it is unfortunate because if instead they were seen extremely quickly by a specialist osteopath, chiropractor or physiotherapist, the likelihood is that, possibly after initial treatment, they would be told that the best remedy was to "keep moving".  Thus the relevant specialists would be relatively likely to suggest to the patients that they should go straight back to work, either undertaking normal duties, or (as appropriate) suitable "light duties".   

13.     Janice Kaye set up two companies with a view to providing services that would enhance the efficiency for large companies of managing musculoskeletal injuries and complaints.  One was the Appellant, which initially traded under a different name, and with which we are concerned in this appeal.  The other, called Osteopaths for Industry, provided standard training courses for companies, largely instructing them in the statutory health and safety requirements in relation to musculoskeletal injuries, and best practice for avoiding them. 
The three strands to the overall activities
14.     There were essentially three strands to the Appellant’s trade.  The first involved putting in place the arrangements with a client company so that if employees of the company suffered some musculoskeletal complaint, whether at work or elsewhere, the appropriate people in the client company (works managers, people in the personnel department etc.) could telephone the Appellant and ask the Appellant to arrange for a speedy consultation for the employee in question with a suitable specialist.   The Appellant then referred to its list of about 800 registered practitioners, and arranged a consultation with the most convenient specialist as quickly as possible.  Since all consultations were arranged on a private, rather than NHS, basis it was generally possible to arrange a consultation within 48, or at worst 72, hours.   

15.    The outcome of the consultation would depend entirely on the circumstances.    On some occasions it would be found that there was virtually nothing wrong with the employee so that the registered practitioner would indicate that the employee should return to work immediately and would require no treatment or at least no further treatment.   In other cases further treatment would be required, and then arranged, but every effort would be made to ensure that the patient was kept moving, and if possible sent back to work.   As already indicated, employees would sometimes be put on light duties, though this would obviously depend on the nature of their usual duties, and what light duties were available.   

16.  There were several aspects to the second strand of the Appellant's trading structure, which are best described as the various "reporting functions".  These functions were in a sense the most novel and central aspects of the Appellant's trade.

17.    The first feature of the reporting activities of the Appellant's trade was that when injured or "suffering" employees were to be referred to a specialist, at the employer company's cost, they were required to consent in advance to the feature that the specialist could make a report on their condition to the Appellant, which would in turn pass on the report to the employing company. In order to make the relevant reports, all 800 registered specialists to whom referrals were sub-contracted had been supplied with comprehensive forms that they had to complete.   The questions and information requests in these forms had been carefully prepared in order to provide information relevant to various different concerns of the employer companies.  Thus the forms would indicate how the registered practitioner had been told the problem originated, so that this information could be contrasted with what the client company itself had been told initially.   Where there were discrepancies as to whether the injury had or had not been sustained at work, the information might be of assistance in defeating false claims for compensation.  The forms would also indicate the exact nature of the injury, and how it had been sustained, if it had been sustained at work.   The reports would also of course indicate what further treatment was thought to be required, and what duties the employee could attend to on returning to work. 

18.     When the individual reports were passed on to client companies, they would be sent to the works manager or the personnel department (whatever was appropriate) so that the relevant person in the company would be given the best possible information about the nature and validity of the claimed injury.  Those individuals in the companies would then know that they could discuss the content of the reports with one of two registered practitioners actually employed by the Appellant, and who were always available on phone lines.  This enabled people like works managers to be given further details or "interpretation" of the detail of the reports, so that they could understand the practical significance of the medical content of the reports. 

19.     A further very important, and quite distinct, aspect of the reporting function was that the Appellant provided composite reports of all injuries and complaints treated for the employees of each client company on a three-monthly basis.  These reports were said to be of great significance because they enabled companies to ascertain whether similar injuries and complaints were more common at one of the company's sites, rather than another, or whether many complaints resulted from the same cause or activity.   We were told for instance in the evidence of Velma Baptiste-Destouche that the most common cause of back injuries to draymen, delivering beer kegs to numerous pubs for breweries, was the act of drawing across the heavy canvas side screens of the large lorries, rather than by actually handling the beer kegs.  They were also able to identify which particular pubs had difficult access for delivering beer kegs.   Information of this nature enabled the company, DHL in this example, to make appropriate changes to the design of lorries, and to request the identified pubs to improve the facilities for receiving deliveries of beer kegs. 

20.    The third strand of the Appellant's trade involved various activities of giving companies further help and information in managing the risk of musculoskeletal complaints.  We were not given particularly extensive information about this function though understood that it included giving training sessions to groups, such as works managers, visiting clients premises in order to try to identify risk areas, and presumably (as an adjunct of the reporting function) liaising with clients in order to identify the most helpful way in which the composite reports could be furnished.   We were also told that information and quarterly newsletters on managing musculoskeletal risk were provided to all client companies.   

21.    This third strand of the Appellant’s trade, particularly the giving of training sessions, and the production of some of the material in the newsletters, was sometimes undertaken by and prepared by the two registered practitioners who actually worked for the Appellant, but others who were not registered practitioners were also involved with this strand of the business.   In the early part of the period under appeal, Janice Kaye herself who had not been a registered practitioner for many years, but was still highly experienced in the field, attended to all these functions on her own.   She also retained a preference for engaging Australian and New Zealand specialists, who, by virtue of not being technically registered in the UK, could not actually provide treatments but who were nevertheless experienced in the field, and cheaper to employ because of the more limited employment opportunities available to them. 

The method of charging 
 
22.    The method of charging for the Appellant’s services was as follows.  The period for which the VAT liability is currently in dispute is the period from April 2003 to July 2008.  For the whole of that period except the last six months, the basis of charging was that companies paid a subscription fee annually or quarterly.  This was negotiated from client to client, but was generally something like £2 a year for each employee of the client company, covered by the scheme. More significantly companies paid the vast bulk of the fees on a "Pay-as-you-go" basis.  This meant that for each consultation with a registered practitioner, the client company paid about £50, which included the self-employed consultant's charge, which would be roughly £25.   The Appellant said that from about January 2008, it had changed its basis of charging and had altogether dropped the subscription charges.   We were told that the subscription fees had only generated something like 2½% of the total turnover, and were proving unpopular with clients, who preferred to pay entirely on the "Pay-as-you-go" basis.  We understood that there had been a small increase to those fees when the subscription fee was dropped.

23.     The evidence left us in some doubt as to whether it was realistic or not to relate the subscription fees to one or another element of the overall services or not, and this does have some relevance to the VAT analysis of the services rendered.  In response to questions from HMRC's counsel, both witnesses from the client companies said that they thought that the subscription fees probably paid for the third strand of service summarised in paragraph 20 above.  The impression that we gained from the Appellant was, however, not particularly consistent with this approach. The Appellant indicated that the various fees charged from time to time (i.e. either subscription fees plus treatment fees, or latterly just treatment fees) simply paid for all of the services.   We were inclined to think that the Appellant’s summary was realistic when it was said that the subscription fee was charged as an opportunity to generate a small amount of up-front income that clients would be unlikely to object to paying, but that when this client expectation was proved unfounded, and the fee was perceived to be unpopular, it was just dropped.  We will refer below to some VAT significance of this difference of view. 

24.     A separate charge was sometimes levied for the services in the third category mentioned above.  Obviously the newsletters, and other routine elements of the third strand of service, were paid for out of the general revenues, though when a special report or a special training session was undertaken, this was usually charged for separately. 

The contract and the client presentations

25.    We were shown the standard-form contract between the Appellant and its clients, and in relation to this, the Respondents stressed the fact that the contract referred only to the obligations regarding the treatment service, and it did not refer to the second and third functions mentioned above.   We accept that this observation was a fair one, but we also accept the Appellant’s contention that the prime purpose of the contract that had been drafted some time ago was to limit the Appellant’s potential liability to clients, and that it did not thus give a realistic indication of the various roles that the Appellant would expect to play. These roles were illustrated in diagrammatic form by slide-show presentations to intending clients, and these presentations did create a picture of the activities of the Appellant that was consistent with the summary given in paragraphs 14 to 21 above.   In the light of the fact that the VAT treatment must be based on the service or services that the Appellant actually provided, and not by reference to a dated contract that did not particularly conform to the client presentations given by the Appellant, and to the great body of evidence given both by Janice Kaye and the witnesses who represented the Appellant’s clients, we will base our decision on the facts as we understood them to be, and not to the more limited service role that a reader of the contract, in isolation,  might have assumed was the role of the Appellant.  
The evidence of clients
26.   One common feature to the evidence given by the witnesses from client companies was that they were most enthusiastic about the worth of the services rendered by the Appellant.   Andrew Collinson had found that the Appellant's services had achieved a vast reduction in days lost by his company through musculoskeletal complaints. This was achieved by two factors.  First, employees with genuine complaints were treated appropriately and sent back to work more swiftly than used to be the case if they simply attended their GP's surgery.  Secondly, those who were found to have nothing or little wrong with them, and other malingerers inclined to book in for a fake 10-day holiday with the aid of some pretence and a sick note, were either sent straight back to work, or began to realise that the old trick no longer worked.   Andrew Collinson thus indicated that his company had computed that for every £1 paid to the Appellant, the company had saved £12.  A further benefit of the services, and the reporting function was that contemporaneous information was filed about injuries.  This helped to reduce dubious compensation claims because if the claims were only filed months after an injury had been treated by a GP, it was extremely difficult for the company to know whether and how, and how seriously, to defend a claim that the injury had been caused by some wrong-practice at work. 

27.    Velma Baptiste-Destouche was equally enthusiastic about the Appellant's services though she placed much more emphasis on the hands-on support that the Appellant gave, essentially in the second and third strands of the trade mentioned above, and she echoed the claims by Janice Kaye that the most valuable feature of the Appellant's services was its professional approach to risk management, and the direct help that it gave DHL in reducing factors that would be likely to occasion injury.  In this context, the distinction was made that the training courses that Osteopaths for Industry gave (and which were of no relevance in relation to this appeal) were basically standard form courses, designed to train people about the various statutory requirements.    Case by case training, and reports prepared on specific risk areas were the sort of work that the Appellant itself provided, essentially in delivering the second and third strands of service summarised above. 

28.     Velma Baptiste-Destouche’s evidence reflected the overall attitude of Janice Kaye to the services provided by her company.  We had no doubt that Janice Kaye did not regard the essence of the role that the Appellant provided as simply an efficient booking service to osteopaths, chiropractors and physiotherapists.  Her whole focus and manifest enthusiasm was geared to providing a “joined-up” pro-active service to client companies that would enable them to manage and reduce their musculoskeletal injury experience, and to reduce time lost to industry.  The Appellant obviously aimed in part to do this by treating individual injuries efficiently, but we had little doubt that Janice Kaye’s greater interest was in providing collated information that would enable client companies to locate areas and activities likely to occasion injuries in their particular businesses, and in generally getting involved with the work practices of client companies in an effort to play a pro-active role in reducing both injuries, and inefficient time losses through injuries.  Velma Baptiste-Destouche made it quite clear that she viewed the essence of the Appellant’s service in the same way. 

The history of the VAT dispute

29.     When the Appellant commenced trading, it registered for VAT purposes on 1 December 1999, and proceeded on the basis that its services were standard-rated services.  No particular evidence was given as to why the Appellant assumed or concluded that its services were properly regarded as standard rated, though it seems obvious that the Appellant must have been aware that medical services rendered by osteopaths, chiropractors and physiotherapists were exempt services because it would have been billed my numerous sub-contractors who would have classed their services as exempt medical services.  Admittedly some registered practitioners might have had a turnover below the compulsory registration threshold, such that they would not have had to charge VAT whatever the nature of their services, but those above that level would clearly have regarded their services as being exempt.  Whether, as seems likely, the Appellant considered that its services were standard rated because they related more to providing risk management services to client companies we do not know, but for one reason or another this is the assumption that the Appellant made. 

30.     When the Appellant received its first VAT audit visit, on 20 March 2002, the HM Customs & Excise officer was shown countless invoices rendered by the Appellant for specific treatment services (i.e. the invoices for charges of £50 or multiples of £50 when invoices covered numerous treatments) and all of these invoices indicated that the charges were "for treatments".     It is not in dispute that the Appellant was not acting as agent, and that instead it was itself legally "providing the treatments", using its various sub-contractors to do the actual medical work, and the invoices made this clear. They certainly did not obscure this critical fact.    Notwithstanding this fact, the HM Customs & Excise officer made a few marginal points about the periods in which various items should be claimed, but raised no issue whatever as to whether the Appellant itself should have been regarded as also providing exempt medical services.  In fact the officer in question appeared to confirm that the company should continue dealing with VAT as it was doing.  We note in passing that the relevant officer may very well not have received the long summary that was given to us in the hearing, indicating how the Appellant’s trade was of wider scope than simply the provision of treatments.   Since the invoices examined would have suggested that the principal role was to give medical treatments, it is all the more surprising that the VAT officer did not point out that this role would be the provision of an exempt medical service.

31.   On 9 July 2004 the Appellant’s accountants wrote to HMRC asking for confirmation that a minor new strand of activity would be rightly classed as being exempt for VAT purposes.    The response on 3 August 2004 made no reference to the then continuing standard-rated treatment of the main services, but did confirm that the new service would be exempt. 

32.    Following a second VAT inspection, the relevant Officer confirmed on 24 October 2005 that the ruling given on 3 August 2004 had been wrong, and that all of the services should be regarded as standard rated. We might observe that the reasoning contained in this letter had absolutely nothing to do with the basis on which the case was later disputed by either party, and was seemingly completely irrelevant. 

33.     Three-and-a-half months later, on 15 February 2006, the VAT officer who had given the ruling referred to in the previous paragraph wrote again to the Appellant, indicating that he now thought that both the original and the new services should have been treated as exempt.  This letter was accompanied by a demand that the Appellant should repay £25,899, relating to the input tax allegedly wrongly recovered in the three-year period since 2002.

34.    For some reason, perhaps as she asserted, so as not to confuse her clients,  Janice Kaye decided that the Appellant should continue to treat its services as standard rated, so that for several further VAT periods this treatment was followed.  This accounts for why the eventual sum in dispute is approximately £60,000, and not the figure mentioned in the previous paragraph for the claim up to early 2006. 

35.    As we have indicated, we do not propose to consider the misdirection claims that have been made in this case by the Appellant.  This, as already indicated, is because:
•	in view of the then widely held assumption that this matter was outside the jurisdiction of the Tribunal, we did not hear argument by either party at the hearing in relation to this matter, and certainly HMRC contended (slightly weakly it would seem) that there had been no misdirection;
•	the extent of the Tribunal’s jurisdiction in relation to this matter remains slightly doubtful at this point; and
•	we have decided to allow the appeal in any event on other grounds. 
36.     We will however make the following observation.  We quite understand that VAT is structured to be a self-assessing tax where the taxpayer must correctly judge his, her, or its appropriate VAT treatment. There is nevertheless something unsatisfactory about the Appellant receiving a £28,000 odd VAT demand for reporting its VAT affairs in a particular way when the points at stake are relatively complex, and when personnel in the Appellant are meant principally to be expert in treating and administering musculoskeletal injuries and injury claims, and those personnel have acted in reliance on, and consistently with confirmations (albeit it some of them self-contradictory) given by HMRC officers who are presumably meant to be expert in administering VAT.   
The points currently in dispute
37.     The basic contention before us, on behalf of HMRC, was that the Appellant's services, rendered in return for the treatment fees, were all properly regarded as exempt medical services.  As already mentioned, the consequence of this contention was that input tax that had been deducted when assuming that these services were standard rated, all fell to be recovered.  HMRC said that they were taking no issue in relation to the subscription charges, which they were thus conceding remained standard-rated charges, said to be levied for the services in what we have referred to as the third strand of the Appellant's trade. 

38.     The basis of the contention on the part of HMRC is that, because the Appellant is acting as a principal and not an agent, the right analysis is that it is providing, via its sub-contractors, medical services.  It is then said that, whilst no point is taken about the minor services that HMRC says are rendered for the subscription fees during the period when they were charged, all the administrative services of compiling and delivering various reports to client companies are all ancillary services, rightly to be treated as taking their nature from the principal service of treatment, thus all being exempt.   In the alternative, if the administrative services cannot fairly be regarded as ancillary, HMRC assert that it is still appropriate to conclude that from an economic point of view the clients still receive one single composite service, and not several distinct services.    Since again the medical aspect of the composite service is said to dominate, the contention remains that the whole service should take its nature, as an exempt medical service, from that dominant element. 
The law
39.     The heading under which it was claimed that the services were exempt was that for medical services, under Group 7 of Schedule 9 to the VAT Act 1994.   
40.     Item 1 of Group 7 provides that:
“The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following:-
(a)	the register of medical practitioners or the register of medical practitioners with limited registration;
(b)	…….
    		(c)     the register kept under the Health Professions Order 2001;

                      (ca)  the register of osteopaths maintained in accordance with the                  	                     provisions of  the Osteopaths Act 1993;

(cb)   the register of chiropractors maintained in accordance with the                                          provisions of the Chiropractors Act 1994.”

41.     Note 2 to Group 7 provides that:
“Paragraphs (a) to (d) of item 1 and paragraphs (a) and (b) of item 2 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”.
42.     Two lines of case law authority were then relevant.   Firstly there were the various cases that seek to clarify when there should be treated as being two or more distinct services, and when two or more elements should be treated as constituting just one service for VAT purposes.  Shortly, it is fair to summarise these by saying that the case of Card Protection Plan Ltd v. C&E Commissioners [1999] STC 270 indicates that if there is a principal or dominant service element, and other ancillary elements merely promote the better enjoyment of the principal supply, then the whole service should be treated as constituting one service and all elements will take their nature for VAT purposes from that of the principal element.  A somewhat different approach, exemplified by Levob Verzekeringen BV v. Staatssescretaris van Financien [2006] STC 766 achieves much the same end result but achieves that by noting that “where two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single, indivisible economic supply which it would be artificial to split”, there should again be treated as being one supply. 

43.     The second line of authority is contained in the recent case of D’Ambrumenil v. S&E Commissioners (Case 307-01)[2004] QB 1179.  This has clarified the VAT meaning of medical services, and has indicated that the notion of providing therapeutic services should be construed fairly broadly, so as to extend for instance to health checks and many elements of preventive medical care. 
The contentions on behalf of the Appellant
44.    Aside from the criticisms of the various directions and indications given by HMRC officers, the main contention on the part of the Appellant was that HMRC had misunderstood the unique nature of the business of the Appellant. It was in other words wrong to approach the case, and the VAT treatment, by regarding the Appellant’s trade as one of providing treatment to injured employees of client companies, with the add-on of a bit of reporting.  The right approach was to observe that the whole business of managing employee injury risk was the central element of the trade, and that identifying risk areas and developing suggestions to reduce the risk of injury in those areas was the core of the Appellant’s trade.

45.     The Appellant’s contentions were well expressed in the following paragraphs that we quote from the Appellant’s Skeleton Argument:

“It is HR UK’s belief that currently our services are ‘unique’ to the UK in respect of absenteeism and risk management of musculoskeletal injury, offering for the first time a completely ‘joined-up’ service integrating effective musculoskeletal sickness absence management to proactive Health and Safety risk management (using quality data feedback and specialist assistance).   The UK Health and Safety Commission have published a ‘best practice’ case study outlining our services on their Health and Safety website.

HR UK’s services are born out of 20 years experience of working with Industry in tackling musculoskeletal Health and Safety risk.  We believe our service is ‘cutting edge’ in its approach and delivery.  We are not aware of any other organisation that currently supplies this entirely joined-up integrated system. Our service cannot therefore be compared to other standard treatment-only referral network services, where the primary aim is in the provision of treatment services and, in the main, are designed to support the insurance industry.
………….
………….

‘Treatments’ by our network suppliers are ancillary to the principal service supply of absenteeism/risk management services to our client companies.   Their presence is necessary for the completeness of the whole absenteeism/risk management service and forms an integral part of the principal supply, which is further outlined below. 
  
It should be appreciated that HR UK’s success in reducing absenteeism is due to the design and efficiency of the supporting case management system.   HR UK’s service is distinct from a simple treatment referral service, which only facilitates access to treatment.   Our success lies in the intensive manner in which we manage the whole process from initial notification of an injury until the employee is back at work and the reporting we produce for our client companies.”
The contentions on behalf of the Respondents
46.     The contentions on behalf of the Respondents were that:
•	this case was a classic example of the type of case typified by Card Protection Plan, in that there was a principal element to the trade, that of providing swift, appropriate and efficient medical treatment for injured employees of client companies, and the reporting elements of the trade were ancillary;
•	in the alternative, from the perspective of clients, there was still one unified service that had as its dominant feature, medical care by registered practitioners;
•	it was accepted that, when they had been charged, subscription fees had been properly regarded as being standard rated, though we might observe that we are not entirely clear what it was assumed that the subscription fees were the consideration for, and more particularly, we are not at all clear why on HMRC’s approach, whatever the subscription fees were paid for was not ancillary to the principal supply if all other non-principal elements were themselves ancillary;
•	various aspects of the Appellant’s business to which attention had been given by the Appellant during the hearing, and in written material presented after the hearing, were internal functions and not elements of service to clients at all, and so we should disregard those functions in considering the nature of the Appellant’s services, and the question of whether, for the purpose of applying Note 2, referred to above, we should concern ourselves with the issue of whether those functions were wholly undertaken by or supervised by “registered practitioners”; 
•	in applying the Note 2 requirement that the Appellant’s services (as distinct from the irrelevant internal functions just referred to) should be “wholly performed or supervised” by registered practitioners, we should proceed in the following way.  We should first apply this test solely to the functions of the principal “treatment provision” element of the composite service; we should accordingly then conclude that the test was satisfied in that context because all the sub-contract providers of the underlying services were “registered practitioners”; and so finally we should then ignore the issue of who rendered the other elements of what HMRC classed as one composite service, since on the Card Protection Plan and other authorities the treatment of the ancillary functions should be governed by the nature of the principal supply, regardless of whether in isolation that would have been so or not. 
•	Finally it would breach the VAT principle of neutrality were we to reach a conclusion at variance with the suggested approach, and conclusion mentioned in the previous bulletpoint.
Findings of fact
47.     There was little material dispute about the facts, but we consider it worth stating that we reached the following conclusions on the facts:
•	We entirely agree with the observation on the part of counsel for HMRC, that internal functions such as the obtaining of client information to enable the fundamental services to be rendered, internal accounting and finance functions, and indeed even high-level management have little or nothing to do with the services actually rendered to clients.
•	In this context, we noted (without meaning any element of criticism) that counsel for HMRC had initially supposed that Janice Kaye’s functions were principally geared to management, whereas it emerged that she was absolutely central to the provision of services to clients, being fully, or often dominantly, involved with the provision of client services. 
•	We consider that it would be very inappropriate to categorise the trade of the Appellant as that of arranging, and providing, through sub-contractors, quick, appropriate and efficient medical treatment for injured employees of client companies, with the add-on of “a bit of reporting”.     We do conclude, with the Appellant, that the trade of the company appeared to be unique, and that the dominant objective of Janice Kaye was to provide a pro-active risk management service to clients in industry, the service designed not just to treat injured individuals but to be involved in locating and trying to minimise or eliminate injury-risk areas of clients’ businesses.
•	It was certainly possible that some clients would avail themselves principally of the injury treatment element of the service.    In those cases, the fact that they would get workers back to work more swiftly, the fact that they would be better able to challenge bogus claims for compensation, and the fact that they would be able to dissuade malingerers from “clocking off sick” for a couple of weeks, would be the principal, and very worthwhile, benefits of the service.
•	Other clients, however, would engage in the exercises to which Janice Kaye was clearly dedicated, of using the benefit of carefully collated past experience in the particular business, and the general experience derived from all clients, to make major attempts and changes in practice  to reduce the risk of employee injury. 
Our Decision
The basis of charging 
48.     In reaching a decision as to the nature, and appropriate VAT treatment of the service or services in this case, it may seem inappropriate to commence the analysis by considering the method of payment, but in this case this seems quite a helpful startingpoint. 
49.    HMRC for their part appear to have been materially influenced, somewhat understandably, by the feature that the major method of charging has been to charge approximately £50 for each visit by an injured employee to a consultant, with the not surprising consequence that the resultant client invoices have referred to the treatment.  This has, not surprisingly, led to the conclusion that the services paid for were medical services. 
50.     Rather less obviously, HMRC has conceded that the subscription charges were always standard rated.  Two of the Appellant’s clients indicated what they thought the subscription charges paid for, though we are not entirely clear what HMRC thought the subscription charges were paid for.  More materially, we were unclear, when it was HMRC’s view that the dominant service was an exempt medical service, with ancillary elements of the service taking their exempt nature for VAT purposes from the nature of the dominant element, why a subscription charge that was doubtless paying for something that on this approach was “ancillary” should not also be a further element of charge for an exempt service. 
51.   We accept the Appellant’s evidence that the Appellant just regarded the subscription charge as part of the overall charge, and a modest up-front charge that would produce a bit of gross revenue (2 ½ % we understand), without too much client resistance.   We accordingly think it realistic to treat all the charges, the subscription charges when they were levied, and the fees ostensibly paid for the consultations, as being payments to pay for all of the services.  On the reasoning that the third-party consultants charged approximately £25 to the Appellant for each consultation, and that the Appellant then charged the client £50, and that we were clearly informed that the Appellant was not making substantial profits (indeed we suspect that it was making small losses) it is perfectly obvious that the Appellant’s costs matched or exceeded the remaining £25 of its £50 charges. We also conclude without any hesitation that these costs were dedicated not so much to ringing up a consultant and booking a consultation, and passing onto the client the completed “one-off” report that the consultant himself had completed, but rather to meeting the expenses of the other services that the Appellant provided.  We appreciate that it was a vital part of the Appellant’s service (indeed it was, in a sense, the prime focus of Janice Kaye’s vision for the company) that the Appellant should prepare the composite forms, indicating all the relevant statistics about the client’s injury experience, and pass these composite reports periodically to clients.   We were told that the preparation of these reports was a complex and time-consuming business, and that it was not a function that was accomplished by computers, and we consider it reasonable to assume that a considerable part of what might be described as the Appellant’s £25 slice of the £50 charges was applied in undertaking the functions that we have listed, in paragraphs 16 to 21 above, as the functions of the second and third strands of the Appellant’s business. 
52.     An interim conclusion, thus, is that all the Appellant’s charges paid in our view for all the services, and that, of the £25 slice of each £50 charge that was in a sense “the Appellant’s own receivable”, much of that element went to pay for the other services rendered by the Appellant, as distinct from any minor administrative functions related to the provision of the treatment service itself. 
The scope of the exemption for medical services
53.     We entirely accept that the result of the D’Ambrumenil case is that we should extend a wide meaning to the notion of medical services.   Notwithstanding this, it is equally clear, and undisputed, that European law has left it to Member States to decide the categories of person whose supplies of medical services should be exempt for VAT purposes.   In the present case, it is Note 2 to Items 1 and 2 of Group 7 in Schedule 9 to the VAT Act that governs whether we should class the Appellant as a person whose supplies might rank as medical services.  This Note provides that the paragraphs that grant exempt status to supplies made by various categories of “registered practitioners” should also include “supplies of services made by a person who is not registered …where the services are wholly performed or directly supervised by a person who is so registered or enrolled”.  This Note obviously applies in the situation where registered practitioners might be employed by a company which supplies their services, and it was even suggested by counsel for HMRC that the obvious application of the Note was to that of registered practitioners operating in corporate form. 
54.    There are three different ways in which we might conclude in this case that Note 2 should operate. 
55.     The simple case would be the one where, as a separate exercise, we concluded that the Appellant was rendering two distinct services, each of which might have a different VAT treatment.   Were it our conclusion that this was the correct approach, then the application of Note 2 would be a simple matter.   We would instantly accept that the treatment services, all rendered via sub-contractors who were all registered, would be covered by Note 2.  Naturally we would not hesitate in reaching this conclusion because there might be non-registered practitioners assisting, in an administrative role, with the provision of the medical services.  Such activities that are not “client-facing”, and not part of the service to clients, but simply internal administrative functions, would be irrelevant to the clear conclusion that all the treatment services would satisfy the Note 2 test.    It would be equally clear that the other real services that the Appellant provides would not satisfy the Note 2 test.    The function of preparing the collated reports, is a function that we regard as a vital part of the service of equipping clients with the essential information to inform them where there are risk areas in their business, which sites are more prone to employee injuries, and possibly why that is.  The functions of going further and cooperating with the Health and Safety employees in client companies to evolve better work practices to reduce injury is also a function that we regard as a clear service provided to clients.     As regards these services, there may be a small involvement of registered practitioners in the provision of these services, but we conclude that it is nearer the truth to say that they are wholly performed by non-registered practitioners, rather than the reverse.    Accordingly, without even having to enquire whether the services might otherwise be exempt medical services, it would be clear that they could not be exempt because they would have been rendered by a person, i.e. the Appellant that did not satisfy, as regards this service, the terms of Note 2. 
55.   The second possible approach to the application of Note 2 is the one commended to us by the Respondents.   This approach is to the effect that there is only one service, with the ancillary functions rendered by the Appellant taking their nature for VAT purposes from the appropriate treatment of the dominant element of the single service.   And in this context it is contended that Note 2 need only be tested, and satisfied, by reference to the facts relevant to the dominant element of the service.     It is naturally then contended that the Note 2 test is satisfied by reference to the treatment services (a point that obviously results from the comments in the previous paragraph), and it is then suggested that the ancillary elements of the service are also exempt, regardless of the fact that they are performed largely by non-registered practitioners. 
56.     The third approach, which we conclude is certainly the correct approach if there is to be treated as just one composite service in this case (i.e. if the approach canvassed in paragraph 54 above is inappropriate), is that the Note 2 test must be satisfied as regards all elements of the service, if there is only one service.   Accordingly in this case, because there are many elements of client-facing service that are not rendered by registered practitioners, Note 2 is not satisfied and the services are standard rated.   In the following paragraphs we will explain why we consider that this approach is the correct one (aside from the situation where paragraph 54 applies to the case) and we will also summarise why we consider that it produces a more coherent and fiscally neutral result for VAT purposes than the one commended to us by counsel for HMRC. 
57.     The first reason for preferring our third approach to that commended to us by counsel for HMRC is that we must consider, in the context of one composite service, whether the services are “wholly performed” or supervised by registered practitioners, and wholly of course means “wholly”, not “partly”.   Equally, if the services must be wholly performed by registered practitioners, it is of no assistance to say that part of the services are wholly performed by registered practitioners.  The test is to be applied to the services, and not part of them, and in any event the notion of part of the services being wholly performed is a self-evident nonsense. 
58.     For VAT purposes, VAT is charged on supplies of services, and each separate service must obviously be dealt with separately.   There is no statutory or regulatory VAT provision that joins two services and treats them as one, or requires them to be analysed from a VAT point of view as if two services became one.   This is of course why case law has concentrated on “elements of a service”.   It may be artificial to split what is economically, from the perspective of the customer, one service, whereupon for VAT purposes there remains one service.   It may be appropriate to treat there as being one supply of service where there is a principal element to the supply and other ancillary elements that merely promote the better enjoyment of the principal element.   But there cannot be two services for VAT purposes that then fall to be treated as one.     Accordingly, where the right analysis is that services constitute one single economic supply, or where services with a principal and ancillary elements are treated as one supply, and there is a requirement that “the services” be “wholly performed” in a particular way, that requirement must be met by reference to the totality of the services that are treated as one service for VAT purposes. 
59.    There are admittedly some confusing references in case law on this subject.   Paragraph 29 of the Court’s decision in CPP is, however, worded, we suggest correctly, precisely in the manner mentioned in the previous paragraph.    It reads:
“29.   In this respect, taking into account, first, that it follows from art 21(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.”
60.     There are several examples in case law of the elements of a composite service being referred to as separate services, and indeed there are periodic remarks that, in that context, the term “service” is being used in a loose and not its strict VAT sense.     In order to find an example of a case law provision that mixes the terms, it is unnecessary to go further than paragraph 30, the very next paragraph of the Court’s judgement in CPP.  We still suggest that notwithstanding the slight confusion caused by the loose use of language, the meaning of the Court in this paragraph is clear and that the point of principle made in paragraph 58 above must be correct.  It is indeed interesting to note that in paragraph 30 of the Court’s decision, there is reference, somewhat confusingly, to “elements of a service, and to “principal and ancillary services”.     
61.     Paragraph 30 of the CPP decision reads as follows:
“30.    There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service.    A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied.”
62.    Proceeding on the basis that we are right to say that any composite service analysis in this case inherently involves the notion that there are elements to the service, but that two distinct services do not in some way become joined, we must consider whether we should treat the reference in Note 2 to the services, in that strict VAT sense.  Or, should we approach the interpretation loosely, as if it was referring to elements of the single service, or to part of the service?   It seems to us that we must assume that the word “services” in a VAT statute was used strictly. It also seems clear that the intention of the draftsman, in requiring the services rendered by a company to have been rendered wholly by registered practitioners was designed to limit the cases where the provision of services by an entity that was not a registered practitioner would be tightly defined, and incapable of including services performed by others.   We accordingly conclude that, where the right analysis for VAT purposes is that all the elements constitute a single service, then the activities in performing the whole of that composite service must be performed by registered practitioners for exemption to apply.
63      It was strongly suggested to us by counsel for HMRC that if we applied Note 2 in the way that at the time we had merely thought was a possible interpretation, and that we now think is the right application of it, we would breach fiscal neutrality by occasioning the result that medical services might be exempt in one context, and then standard rated in another.    We disagree with this observation. 
64.     This case is all to do with “stranded” VAT, i.e. input VAT that a trader cannot recover because it is incurred in relation to exempt services that the trader provides.   When one bears in mind that, in this case, supplies to the Appellant by all the 800 registered practitioners will anyway have been exempt medical supplies, unless the suppliers’ level of service placed them below the registration threshold, VAT on all supplies to those registered practitioners will already have become stranded.   Either it will have been borne by a practitioner who was not registered at all, or in those cases where a supplier was registered for some reason, then the input VAT referable to the exempt supplies to the Appellant will have been disallowed, and will have become stranded VAT at that level.   Surely moreover that level is a realistic level at which input VAT should become stranded VAT. After all, whilst we were given no information on this point, it would seem very likely that most of the Appellant’s remaining costs, disregarding the charges from the sub-contractors, would have been referable to the second and third strands of its whole activity.  Since these activities would have been very largely performed by non-registered practitioners, and many might well in isolation not have been regarded as medical services at all, it rather seems to us that the Respondents’ contended construction of Note 2 would have led to VAT having nothing to do with medical services becoming stranded VAT, whereas in any event in this case, any underlying VAT that may have been included amongst the charges borne by the underlying sub-contractors (i.e. input VAT plainly referable to medical supplies) will have rightly become stranded VAT. 
65.    Another point that reinforces the point made in the previous paragraph is that the Appellant in this case could have acted as an agent to book the services of registered practitioners directly for the Appellant’s customers, whereupon the Appellant’s services would have been seen to constitute various administrative services as agent, and those services described as the second and third strand of services.  Virtually none of these services would have been rendered by registered professionals.  We accept that the Appellant was not acting as agent in this case, but this point does rather emphasise how the conclusion contended by the Respondents would have affected input VAT that really had nothing to do with the provision of services by registered practitioners, and very often nothing to do with medical services either. 
66.    Our decision is that, unless we conclude that the Appellant delivered two distinct services in the manner dealt with in paragraph 55 above, then it follows that the Appellant’s service was exempt for VAT purposes because the Appellant was not such a person that supplies of medical services by it ranked as exempt medical services. 
Other bases for our decision
67.    Two questions remain.   The first is whether it is right to treat the Appellant as providing just one composite service, or whether the Appellant provided two or more distinct services.  The second is what the nature of the service was if we conclude that there was one composite service. 
68.    We find the first of those questions quite finely balanced.   It is obviously feasible for a company to provide the treatment services in isolation, and indeed in the passage that we quoted in paragraph 45 above, the Appellant’s skeleton argument revealed that other companies perform just this service.  In a limited sense, companies could also render the advisory elements of the risk management service, without having rendered or being involved with the treatment element.  We nevertheless consider that it is appropriate to say that, from the perspective of the client, and in the words of Janice Kaye, the Appellant provided a “joined-up” service.  Indeed much of the advisory work and the compilation of composite reports was based on the treatment experience that the Appellant had derived by undertaking that vital first strand to its overall service.   HMRC contended that there was one service (though in some slightly extraordinary way, subscription fees were still accepted to be standard rated) and the Appellant also stressed that the whole essence of its service was its integrated, or “joined-up” nature.  The advisory work undertaken by the Appellant may on occasions have taken the form of newsletters that would have passed on general experience, but the core of the Appellant’s trade was to understand fully the details of the client’s trade, and to deal on a point-by-point basis with recurrent injuries experienced by that client’s employees and thus locate the cause of those injuries and try to eradicate that cause.   We accept that the right analysis in this case is that the Appellant rendered only one integrated service. 
69.     The conclusion just given renders it strictly irrelevant to decide whether HMRC was right to contend that there was a dominant aspect to that trade, and that that aspect was, as HMRC contended, the provision of medical treatment, “with a bit of reporting on the side” as an ancillary function.    This is because once we treat there as being one service, the conclusion given in paragraph 66 above means that the Appeal must be allowed. 
70.    We should nevertheless give an indication as to whether we accept HMRC’s case that the dominant service was that of the provision of medical treatments, with the add-on of a bit of reporting, and other ancillary services, or whether we accept the Appellant’s summary that we have already quoted in paragraph 45 above. This summary was that the essence of the trade was that of injury risk, and absence,  management performed for industry, encompassing employee treatment, and with the risk management function being based significantly on each client’s particular facts. 
71.      In this regard, we think it inappropriate to conclude, along CPP lines, that the medical service was the dominant one, and that the advisory work was merely designed to foster the better enjoyment of the treatment service.   The composite reporting and the further cooperation with clients to eliminate injury risks did not enhance the treatments given to individual workers, but constituted a prime aim of the service, and certainly in Janice Kaye’s mind and that of some of her clients, the central feature of the services.  We consider that this case is more in line with those of College of Estate Management v. HMRC [2005] 1 WLR 3351, and HMRC v.  Weight Watchers (UK) Ltd [2008] STC 2313 and HMRC v. David Baxendale Limited [2009].    The common feature of those cases was that there was an over-arching description of the supply.   Thus in College of Estate Management, the fact that the basic way in which education was provided was by the provision of written material did not govern the nature of the supply. The over-arching description of the supply was nevertheless that there was a provision of education.  We conclude in this case that the whole driving force of Janice Kaye’s business is to be pro-active in providing to industry, as she described it, “a joined-up injury risk, and absence, management service”.   That may have been largely dependent on conducting the treatment service, just as the College of Estate Management fulfilled its education role by providing written materials, but it was still the over-arching supply.  We consider that aspects of that overall supply would not have qualified as medical services, quite apart from the fact that on this approach the case for dismissing the role of non-registered practitioners in performing the Appellant’s service, when applying the Note 2 test, would have become absolutely untenable on any basis.  Accordingly we would have reached the same conclusion on this basis, and the appeal would again have been allowed.
Right of Appeal
72.     The Respondents will obviously know that they can seek to appeal against this decision, either by applying to the First-Tier Tribunal, or if the application at that level is turned down, by applying to the Upper-Tier Tribunal.   We only mention this, and it is certainly not for us to advise the Appellant as to how it deals with its VAT affairs until this dispute is finally resolved, but we know that for some time the Appellant has been proceeding in a cautious manner, either accepting a disallowance of input tax, or at least reserving in some way to pay current VAT should input tax be disallowed, as HMRC has contended.  We simply mention that the Appellant should bear the possibility of an appeal in mind in considering how to deal with its current VAT liabilities. 
Costs
73.     This Appeal commenced before the VAT and Duties Tribunal so that we can order that HMRC pays the Appellant’s reasonable costs.  What they might be where Janice Kaye had, at most, only limited third party assistance with her presentation, we do not know.   However we do award the Appellant its reasonable costs.

HOWARD M NOWLAN
TRIBUNAL JUDGE
RELEASE DATE: 19 March 2010