VATWELF3025 – Social services: VAT liability for payroll services following the decision of the Cheshire Center for Independent Living (“Cheshire”) to concede its appeal to the Upper Tribunal. – HMRC internal manual

The Upper Tribunal reversed the decision of the First-tier Tribunal in the above appeal. There is no change to HMRC’s position which was that the appeal was wrongly decided on the grounds decided by the First Tier Court.

The case concerned the liability to VAT of payroll services provided to disabled people to enable them to employ a personal assistant to help them live independently at home. The question was whether it was a service directly linked to the provision of care and therefore exempt.

The appellant was a charitable organization that provided a range of disability support services, including a payroll service. People with disabilities received direct payments from the local authority to enable them to employ a personal assistant.

There are various legal and administrative requirements for employment and this includes payroll services, such as:

salary calculation

deduction of PAYE and NICs

registration and filing with HMRC

automatic registration for pension contributions and dismissal

sick and vacation payment calculations

Cheshire has entered into contractual agreements with people with disabilities to provide these payroll services.

HMRC’s view was that the payroll service was not considered a service directly linked to social care under Section 9 Group 7 and was therefore subject to standard VAT.

The trial court allowed Cheshire’s appeal on the grounds that the exemption was consistent with the objective of reducing the cost of care and improving its accessibility for those affected. She found that the service was incidental to the care and support provided by the personal assistant and was essential to the latter service.

He concluded that the service was therefore exempt. The decision is reported to [2019] UKFTT 354 (TC).

HMRC’s position was that the First Tier Tribunal erred in law because the decision did not fully consider the criteria set out in Diagnostiko & Therapeftiko Kentro Athinon-Ygeia AE (Joined Cases C-394/04 and C -395/04). These included a requirement that, in order to be exempt from VAT, the services had to “logically form part of or be an indispensable step” in the provision of general care and domestic help provided to the disabled person. HMRC considers that this test has not been met.

However, another motive was accepted by Cheshire. The additional reason was that the payroll service could not be incidental to the care provided to persons with disabilities, since an ancillary service can only be exempt if it is incidental to a main exempt service.

The personal assistants were employed by the disabled persons in question and the care they provided therefore fell under an employment contract which did not fall within the scope of VAT and could not constitute an exempt service. The supply of payroll services could therefore not be exempted because it was incidental to a non-exempt service and did not meet one of the preconditions for being a supply closely linked to well-being.

There is no change to HMRC policy that these payroll services are not exempt social services. The guidance on direct payment services in paragraph 5 of VAT Notice 701/2 Social Goods and Services refers to exempt social services provided to the care recipient. Payroll services are not covered by these guidelines.

The effect of Cheshire’s withdrawal of its appeal to the higher court is that the first tier court’s decision has been overturned. With the consent of the parties, the Upper Tribunal ordered that the substantive decision be reversed and restored. He will no longer be heard by the Court of First Instance.

Due to the Upper Tribunal’s quashing of the First-tier Tribunal’s decision, it is not possible to rely on this decision as conclusive. HMRC policy remains as set out above, and cases of exemption requests where the facts are materially similar to those in the Cheshire case will be rejected.