Does VAT exemption for ‘welfare services’ extend to provision of a payroll service? Cheshire Centre for Independent Living case

*Update*: The Upper Tribunal granted HMRC permission to appeal. Cheshire Centre for Independent Living withdrew from the Upper Tribunal appeal. The decision of the First-tier Tribunal has been set aside and HMRC’s appeal allowed.


Cheshire Centre for Independent Living (‘the charity’) has been involved in a long-running dispute with HMRC over the VAT treatment of charges made to disabled persons in running a payroll service.  The scenario arises as follows.

A disabled person may need a carer.  Where possible, they are encouraged to engage directly with their carer, so they become an employer.  The charity gets involved in a number of ways, one of which is to offer to manage remuneration of the carer.  This means running a payroll service for the one employee.  But this is not a ‘plain vanilla’ payroll, since extra guidance and help is needed to fulfil it, as a consequence of the disability of the customer, and this is duly provided.  It is the charges made for this payroll service that are the focus of this case.  HMRC said the supplies were standard rated, whereas the charity says they are exempt as a welfare supply.

The matter was litigated, and the First tier Tribunal has decided that the service is exempt from VAT.  We hope that HMRC accepts this and does not appeal, but that is a possible next step.

The core of the charity’s case is that one should not seek only to assess the objective content of a service, divorced from the capacities of its recipient, but should consider what the service means to that particular recipient (or class of recipients).  It is the nature of the need that determines if it is welfare.  And the exemption applies solely to charities making supplies to people in certain special classes which denote some from of social security aspect.  The tribunal accepted this.

It also accepted the view that, without the payroll service, the disabled user would not have the capacity to engage the carer.  If charged VAT on the service, the user’s benefits payment would be eroded further by that VAT charge leaving less to use to pay for the carer’s time, thus reducing the level of welfare.  It accepted that the service was only relevant as a result of the need for care services, and was thus of no independent utility for the user.  It was, in the words of the provisions of the Principal VAT Directive, “closely linked” with welfare activity.  It merely better enabled enjoyment of the supply of welfare by the carer, which (HMRC agreed) was, in itself, an exempt welfare service[1] (though if the persons were employed, it seems that the carer did not supply a service that was within the scope of VAT at all).  And the intention behind the welfare exemption was served by exempting this service, as it was part and parcel of the care provision.

Even though the facts of the case showed that this payroll service had features that went beyond the usual processes for payroll per se, to deal with the particular needs of these customers, it appears that the tribunal did not even rely on these differentiators.  It was sufficient that the service was ‘ancillary’ to the welfare supply in the manner discussed above, to give a basis for the exemption.

It is curious that, if HMRC accepted (as they appeared to do) that the carer was providing exempt services to the final consumer, they did not apply the principles from the CJEU decision of Stichting Kinderopvang Enschede C-415/04, which established that the services of arranging an exempt welfare service were exempt when provided by a charitable body.  But, in any case, the tribunal was satisfied, without reliance on that decision, that these services were ‘closely linked’ to welfare work, and that was enough to satisfy the test.

It is difficult to discern the tax policy rationale for HMRC’s intended outcome, since it fails to take account of government policy in seeking to give as much independence to disabled users as possible, and fails to look at the position as a whole.  HMRC needlessly challenged a case where they could sensibly have accepted the more permissive path with no risk of appearing to stretch the exemption to breaking point, nor to open the proverbial floodgates to abuse.

[1] Paragraph 53 of decision

Graham Elliott is Technical Adviser to the Charity Tax Group

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