Cascade Care Limited v The Commissioners For HMRC

The Appellant (“Cascade”) provides specialist residential and supported living services to adults with mental health needs, autism, learning disabilities and acquired brain injuries at sites in both England and Wales.

The appeal concerns the VAT liability of Cascade’s services where those services are supplied in Wales at sites regulated by Care Inspectorate Wales (“CIW”). Cascade considers that its supplies in Wales are standard-rated for VAT purposes.

By a clearance application dated 18 December 2023 Cascade sought confirmation from HMRC that supplies made in Wales fall outside the VAT exemption provided under item 9 of Group 7, Schedule 9 to the Value Added Tax Act 1994 (“Item 9”, “Group 7”, “Schedule 9” and “VATA 1994” respectively), due to the omission of the Welsh Assembly or Senedd Cymru/Welsh Parliament from Note 8 to Group 7 (“Note 8”).

On 4 March 2024 HMRC rejected Cascade’s contention, confirming that the exemption was applicable to Cascade’s circumstances.

On 22 March 2024, Cascade appealed to this Tribunal.

A supply of goods or services is an exempt supply if it is of a description specified in Part II of Schedule 9 and it is not of a description specified in Part II of that Schedule: s 31(1) VATA 1994.

Part II of Schedule 9 is organised into groups. Group 7, so far as material, provides as follows:

“Group 7— Health and welfare

Item No.

…

9

The supply by—

(a)

a charity,

(b)

a state-regulated private welfare institution or agency, or

(c)

a public body,

of welfare services and of goods supplied in connection with those welfare services.

Notes:

…

(6)

In item 9 “welfare services” means services which are directly connected with—

(a)

the provision of care, treatment or instruction designed to promote the physical or mental welfare of elderly, sick, distressed or disabled persons,

(b)

the care or protection of children and young persons, or

(c)

the provision of spiritual welfare by a religious institution as part of a course of instruction or a retreat, not being a course or a retreat designed primarily to provide recreation or a holiday,

and, in the case of services supplied by a state-regulated private welfare institution, includes only those services in respect of which the institution is so regulated.

…

(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;

(b)

an Act of the Scottish Parliament;

(c)

an Act of the Northern Ireland Assembly;

(d)

an Order in Council under Schedule 1 to the Northern Ireland Act 1974;

(e)

a Measure of the Northern Ireland Assembly established under section 1 of the Northern Ireland Assembly Act 1973;

(f)

an Order in Council under section 1(3) of the Northern Ireland (Temporary Provisions) Act 1972;

(g)

an Act of the Parliament of Northern Ireland.”

Note 8, which defines “state regulated”, was inserted into VATA 1994 by the Value Added Tax (Health and Welfare) Order 2002 (the “2002 Order”). The 2002 Order was made by negative resolution.

Item 9 implements the Article 132(1)(g) of Council Directive 2006/112/EC (the “Principal VAT Directive”), which states:

“1.

Member States shall exempt the following transactions:

…

(g)

the supply of services and of goods closely linked to welfare and social security work, including those supplied by old people’s homes, by bodies governed by public law and by other bodies recognised by the Member State concerned as being devoted to social wellbeing;

…”

The first three stages of Welsh devolution were summarised by Lord Reed and Lord Thomas in Agricultural Sector (Wales) Bill (AG Ref) [2014] UKSC 43; [2014] 1 WLR 2622 (“Agricultural Sector (Wales) Bill”) as follows:

“The first phase of devolution: executive devolution under the Government of Wales Act 1998

19.

The Government of Wales Act 1998 (the “GWA 1998”) established the first phase of devolution to Wales in the form of what has been described as executive devolution. That Act established the Assembly as a single body corporate. It was given the function to make subordinate legislation in place of the Secretary of State and to elect an Assembly First Secretary who with Assembly Secretaries appointed by him were to exercise administrative functions.

…

The second phase of Welsh devolution: the [Government of Wales Act 2006 (“GWA 2006”)], the split of legislative and executive functions and the competence to legislate under Legislative Competence Orders

24.

In 2004 a Commission under Lord Richard of Ammanford recommended significant changes to the scheme of devolution for Wales. As a result the Secretary of State for Wales published in June 2005 a White Paper, Better Governance for Wales (Cm 6582). It proposed a second phase of devolution by separating the legislative and executive functions of the Assembly and creating powers under which the Assembly could be enabled by Orders in Council to make or modify primary legislation.

25.

The White Paper also proposed provision for a possible move to a third phase of devolution:

‘3.22 … However, it may prove in the future that even these additional powers are still insufficient to address the Assembly’s needs and the option of providing the Assembly with further enhanced law-making powers needs to be available.

3.23

This would mean transferring primary legislative powers over all devolved fields direct to the Assembly. The Government is clear that this would represent a fundamental change to the Welsh settlement and would have to be endorsed in a referendum. The Government has no current plans for such a referendum but, in order to avoid the necessity of a third Government of Wales Bill, it proposes to provide for the possibility in this legislation.

…

3.26

Conferring primary legislative powers on the Assembly would mean that, like the Scottish Parliament, it would be able to make law on all the matters within its devolved fields. This would not include those subjects which remain the responsibility of Whitehall Departments for Wales as well as for England. Like Scotland, these would include Fiscal and Monetary Policy, Immigration and Nationality and Social Security. Also excluded would be fields where the Scottish Executive, and the Secretary of State for Scotland before devolution, have functions but the Assembly does not, such as civil and criminal law, the administration of justice, police and the prison service.’

26.

The GWA 2006 gave effect to each of these proposals.

i)

Parts 1 and 2 separated and redefined the functions of the Assembly and the Welsh Assembly Government.

ii)

Part 3 provided for the second phase of devolution by giving the Assembly competence to make Assembly Measures which could amend primary UK legislation or take effect as primary legislation within the conditions set out in sections 94-95 and Schedule 5. Section 94 enabled the Assembly to make Assembly Measures which related to one or more of the ‘matters’ specified in Schedule 5. Section 95 enabled Schedule 5 to be amended by Order in Council so as to add, vary or remove matters relating to the ‘fields’ listed in Schedule 5, and so as to add, vary or remove such fields…

iii)

Section 103 of Part 4 and Schedule 6 provided for a referendum to take place in the future on the question of whether the remaining provisions of Part 4 providing for the Assembly to have power to make Acts within the competence set out in sections 107-109 and Schedule 7 should come into force.

27.

The separation of the functions of the Assembly and the Welsh Government came into effect on 4 May 2007 and the powers under Part 3 and Schedule 5 took effect then…

The referendum in 2011

28.

In June 2010 a decision was made to hold a referendum under section 103. Following the referendum in March 2011, the remaining provisions of Part 4 of the GWA 2006 were brought into force on 6 May 2011, giving effect to the third phase of devolution.

The third phase of devolution: the power of the Assembly to make Acts under Part 4 and Schedule 7

29.

The legislative scheme for the third phase of devolution under Part 4 of, and Schedule 7 to, the GWA 2006 did not follow the scheme of devolution for Scotland and Northern Ireland. Under those schemes, often referred to as reserved powers models, competence is given to the devolved legislatures in respect of all matters, unless the matter is excepted by way of reservation to the UK Parliament. The GWA 2006, despite the recommendation of the Richard Commission that the reserved powers model of Scotland and Northern Ireland be adopted, gave legislative competence only in respect of enumerated matters, in other words what is referred to as a conferred powers model.”

Under this third phase of devolution, the Regulation and Inspection of Social Care (Wales) Act 2016 (“RISW 2016”) was passed by the National Assembly for Wales, introducing a new regulatory regime for the registration and regulation of certain social care services.

In outline, RISW 2016 provides for persons who provide regulated services to register with Welsh Ministers. RISW 2016 gives Welsh Ministers broad powers to regulate such persons, including requiring information, performing inspections and taking action where requirements are not met. The functions and duties of Welsh Ministers under RISW 2016 are undertaken by CIW.

CIW commenced its regulation of welfare services in Wales on 1 January 2018. At all relevant times until 1 January 2018, the Care and Social Services Inspectorate Wales (the “CSIW”) regulated welfare services supplied in Wales. The CSIW was regulated pursuant to the Care Standards Act 2000, an Act of Parliament. It is agreed that any supplies of welfare services (or related goods) made by Cascade in Wales whilst regulated by the CSIW were exempt from VAT.

For completeness I note that a further stage of devolution took place with the enactment of the Wales Act 2017. This switched Wales from a conferred powers to a reserved powers model (like Scotland since 1998).

Section 16 of the Wales Act 2017 also inserted a new s150A into GWA 2006. By Section 2 of the Senedd and Elections (Wales) Act 2020 the National Assembly for Wales renamed itself as “Senedd Cymru or the Welsh Parliament”.

The primary argument of Cascade relies on a plain and literal reading of the legislation. Since 1 January 2018 CIW commenced its regulation of welfare services in Wales, pursuant to an act of the National Assembly of Wales, and such an act does not fall within the definition of “Act” in Note 8. Therefore the services are not “state-regulated” and so the exemption in Item 9 does not apply.

HMRC submit that such a literal construction should not be adopted either because (i) there is a plain drafting error; (ii) on the basis of an updating construction; or (iii) by adopting a conforming interpretation.

HMRC submit the principles to be applied are found in the speech of Lord Nicholls of Birkenhead (with whom the other Law Lords agreed) in Inco Europe Ltd and Others v First Choice Distribution [2000] UKHL 15; [2000] 1 WLR 586, 592C-593A (“Inco Europe”) where he said:

“I freely acknowledge that this interpretation of section 18(1)(g) involves reading words into the paragraph. It has long been established that the role of the courts in construing legislation is not confined to resolving ambiguities in statutory language. The court must be able to correct obvious drafting errors. In suitable cases, in discharging its interpretative function the court will add words, or omit words or substitute words. Some notable instances are given in Professor Sir Rupert Cross’s admirable opuscule, Statutory Interpretation, 3rd ed. (1995), pp. 93–105. He comments, at p. 103:

‘In omitting or inserting words the judge is not really engaged in a hypothetical reconstruction of the intentions of the drafter or the legislature, but is simply making as much sense as he can of the text of the statutory provision read in its appropriate context and within the limits of the judicial role.’

This power is confined to plain cases of drafting mistakes. The courts are ever mindful that their constitutional role in this field is interpretative. They must abstain from any course which might have the appearance of judicial legislation. A statute is expressed in language approved and enacted by the legislature. So the courts exercise considerable caution before adding or omitting or substituting words. Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed. The third of these conditions is of crucial importance. Otherwise any attempt to determine the meaning of the enactment would cross the boundary between construction and legislation: see per Lord Diplock in Jones v Wrotham Park Settled Estates [1980] AC 74, 105-106. In the present case these three conditions are fulfilled.

Sometimes, even when these conditions are met, the court may find itself inhibited from interpreting the statutory provision in accordance with what it is satisfied was the underlying intention of Parliament. The alteration in language may be too far-reaching. In Western Bank Ltd v Schindler [1977] Ch 1, 18, Scarman LJ observed that the insertion must not be too big, or too much at variance with the language used by the legislature. Or the subject matter may call for a strict interpretation of the statutory language, as in penal legislation. None of these considerations apply in the present case. Here, the court is able to give effect to a construction of the statute which accords with the intention of the legislature.”

HMRC say that this Tribunal can be abundantly sure that:

The insertion is not too big, it simply completes a list of institutions reflecting devolution arrangements as they now prevail in the UK.

Further, the subject matter is not penal, it is concerned with the appropriate charging of VAT in a consistent and comprehensive manner (as envisaged by the explanatory note to the 2002 Order) across the nations of the UK.

HMRC suggest since the 2002 Order was made by negative resolution, being laid before Parliament on 20 March 2002 and coming into force the following day, such a correcting interpretation is particularly apt. In support of this they rely on the speech of Lord Mance in R (Noone) v Governor of Drake Hall Prison [2010] UKSC 30; [2010] 1 WLR 1743 at [75].

HMRC rely on the principle articulated in Lord Wilberforce’s dissent in Royal College of Nursing of the United Kingdom v DHSS [1981] AC 800, (“Royal College of Nursing”) which they note was subsequently approved in R (Quintavalle) v Secretary of State for Health (“Quintavalle”) [2003] UKHL 13, [2003] 2 AC 687 at [10] and (more recently) in R (N3) v Home Secretary at [64]. In Royal College of Nursing Lord Wilberforce said:

“In interpreting an Act of Parliament it is proper, and indeed necessary, to have regard to the state of affairs existing, and known by Parliament to be existing, at the time. It is a fair presumption that Parliament’s policy or intention is directed to that state of affairs. Leaving aside cases of omission by inadvertence, this being not such a case, when a new state of affairs, or a fresh set of facts bearing on policy, comes into existence, the courts have to consider whether they fall within the Parliamentary intention. They may be held to do so, if they fall within the same genus of facts as those to which the expressed policy has been formulated. They may also be held to do so if there can be detected a clear purpose in the legislation which can only be fulfilled if the extension is made. How liberally these principles may be applied must depend upon the nature of the enactment, and the strictness or otherwise of the words in which it has been expressed. The courts should be less willing to extend expressed meanings if it is clear that the Act in question was designed to be restrictive or circumscribed in its operation rather than liberal or permissive. They will be much less willing to do so where the subject matter is different in kind or dimension from that for which the legislation was passed. In any event there is one course which the courts cannot take, under the law of this country; they cannot fill gaps; they cannot by asking the question ‘What would Parliament have done in this current case – not being one in contemplation – if the facts had been before it?’ attempt themselves to supply the answer, if the answer is not to be found in the terms of the Act itself.”

I have quoted here the full passage approved in Quintavalle: in their skeleton HMRC only quote the first two sentences, finishing with “is directed to that state of affairs”, although I was taken to the full passage in submissions.

HMRC then submit that regard should be had to the fact that, when the 2002 Order was made, the GWA 2006 had not been enacted so the National Assembly for Wales had no powers to pass primary legislation.

Alternatively HMRC say the Tribunal must apply a conforming interpretation in conformity with Marleasing SA v La Comercial Internacional de Alimentacion SA (C-106/89) [1990] ECR I-4135 (“Marleasing”). The scope of the Marleasing principle of interpretation was set out by Sir Andrew Morritt C in Vodafone 2 v HMRC [2009] EWCA Civ 446, [2009] STC 1480 (“Vodafone 2”) at [37]-[38] (the passage being subsequently approved by the Supreme Court in Robertson v Swift [2014] UKSC 50, [2014] 1 WLR 3438).

HMRC submit that in Leisure, Independence, Friendship, and Enablement Services Ltd v HMRC [2020] EWCA Civ 452; [2020] STC 898 (“LIFES”) the Court of Appeal considered Article 132(1)(g) of the Principal VAT Directive and found that:

HMRC then refer to Arnold LJ’s decision in LIFES at [93] and state that Cascade’s position would result in an impermissible discrimination between what are, in substance, entirely comparable state-regulated providers where the devolved legislature of Wales has expressly, and legitimately, sought to regulate the provision of the relevant services. Accordingly they say that the Marleasing principle should be applied to favour an interpretation that conforms with fiscal neutrality.

HMRC observe that the application of the Marleasing principle in such circumstances is consistent with the saving provisions set out in s 28 Finance Act 2024.

Cascade say that HMRC’s interpretation ignores the clear wording of the statute. Note 8 sets out an exhaustive list and a new category of state-regulation cannot be added by way of judicial interpretation. The alteration to the wording which HMRC seek requires legislative amendment.

Statutory interpretation entails ascertaining the meaning of the words actually used by Parliament in light of their context and purpose: R (oao O, a minor) v Home Secretary [2022] UKSC 3; [2023] AC 255 (“oao O”) [28]-[30].

It is only the draftsman’s intention in 2002, when Note 8 was introduced, which is relevant. It is not relevant what is the current intention of Parliament (let alone HMRC).

Further, HMRC’s case does not respect the structure of the drafting. Item 9 and Note 8 plainly do not specify geographic areas of the UK which qualify, or not, for exemption. Instead, there is a universal test that private welfare institutions can only qualify for exemption if they are regulated under particular types of enactment. There is nothing in the words used in the legislation to indicate that exemption was intended to apply to welfare services supplied in Wales irrespective of how those services were regulated. The legislation specifically differentiates between services based on the type of Act which governs the regulation.

An updating construction concerns interpretation. Essentially for the reasons above HMRC’s reading of the legislation would go beyond interpretation.

Whilst the Principal VAT Directive can have direct effect, so a taxpayer can rely on it, member states may not.

A conforming construction is only possible if:

With regard to whether treating Cascade’s supplies as taxable would breach fiscal neutrality:

With regard to the possibility of a conforming interpretation, Cascade acknowledge that Vodafone 2 allows a “highly muscular” approach to statutory interpretation, which can include altering the literal meaning. However, the ability to apply a conforming construction is limited: HMRC v Ampleaward Ltd [2021] EWCA Civ 1459 (“Ampleaward”) at [86]-[97].

Cascade notes that recent examples where legislation has been found to be incapable of a conforming construction include Ampleaward and TalkTalk Telecom Limited v HMRC [2023] UKFTT 12 (TC). In both cases, the interpretation required to make the statute conform went against the grain of the legislation.

It is first convenient to note some familiar principles of statutory interpretation.

As the Supreme Court observed in oao O:

“29.

The courts in conducting statutory interpretation are ‘seeking the meaning of the words which Parliament used’: Black-Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1975] AC 591, 613 [(“Black-Clawson”)] per Lord Reid of Drem. More recently, Lord Nicholls of Birkenhead stated:

‘Statutory interpretation is an exercise which requires the court to identify the meaning borne by the words in question in the particular context.’

(R v Secretary of State for the Environment, Transport and the Regions, Ex p Spath Holme Ltd [2000] UKHL 61; [2001] 2 AC 349, 396 [(“Spath Holme”)]). Words and passages in a statute derive their meaning from their context. A phrase or passage must be read in the context of the section as a whole and in the wider context of a relevant group of sections. Other provisions in a statute and the statute as a whole may provide the relevant context. They are the words which Parliament has chosen to enact as an expression of the purpose of the legislation and are therefore the primary source by which meaning is ascertained. There is an important constitutional reason for having regard primarily to the statutory context as Lord Nicholls explained in Spath Holme, 397:

‘Citizens, with the assistance of their advisers, are intended to be able to understand parliamentary enactments, so that they can regulate their conduct accordingly. They should be able to rely upon what they read in an Act of Parliament.’

30.

External aids to interpretation therefore must play a secondary role...”

With regard to the oft used expression “intention of Parliament”, it is helpful to more fully consider the speech of Lord Nicholls of Birkenhead in Spath Holme, partly quoted above:

“Statutory interpretation is an exercise which requires the court to identify the meaning borne by the words in question in the particular context. The task of the court is often said to be to ascertain the intention of Parliament expressed in the language under consideration. This is correct and may be helpful, so long as it is remembered that the ‘intention of Parliament’ is an objective concept, not subjective. The phrase is a shorthand reference to the intention which the court reasonably imputes to Parliament in respect of the language used. It is not the subjective intention of the minister or other persons who promoted the legislation. Nor is it the subjective intention of the draftsman, or of individual members or even of a majority of individual members of either House. These individuals will often have widely varying intentions. Their understanding of the legislation and the words used may be impressively complete or woefully inadequate. Thus, when courts say that such-and-such a meaning ‘cannot be what Parliament intended’, they are saying only that the words under consideration cannot reasonably be taken as used by Parliament with that meaning. As Lord Reid said in Black-Clawson, 613:

‘We often say that we are looking for the intention of Parliament, but that is not quite accurate. We are seeking the meaning of the words which Parliament used.’

In identifying the meaning of the words used, the courts employ accepted principles of interpretation as useful guides. For instance, an appropriate starting point is that language is to be taken to bear its ordinary meaning in the general context of the statute. Another, recently enacted, principle is that so far as possible legislation must be read in a way which is compatible with human rights and fundamental freedoms: see section 3 of the Human Rights Act 1998. The principles of interpretation include also certain presumptions. To take a familiar instance, the courts presume that a mental ingredient is an essential element in every statutory offence unless Parliament has indicated a contrary intention expressly or by necessary implication.”

In Inco Europe Lord Nicholls acknowledged that it was possible to read words into legislation to correct obvious drafting errors. Given the interpretive role of courts/tribunals, before doing so the Tribunal must be abundantly sure of: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed.

I now consider these factors in turn.

Here it is abundantly clear that when Note 8, which defines “state regulated”, was inserted into VATA 1994 by the Value Added Tax (Health and Welfare) Order 2002 what the draftsman was trying to do, in the definition of “Act”, was to capture all entities that could then (or in the recent past) enact primary legislation. The omission of the National Assembly for Wales reinforces this purpose – as then it could only pass delegated legislation. The draftsman’s purpose was therefore that all primary legislation would be covered by the definition of “Act”.

It is also abundantly clear, from the discussion in Agricultural Sector (Wales) Bill, that when GWA 2006 was passed the purpose of that Act was to separate and redefine the functions of the National Assembly for Wales and the Welsh Assembly Government and to devolve competence to the National Assembly for Wales to make Measures which could amend primary UK legislation. Its purpose was also to provide for further devolution of competencies to the National Assembly for Wales, under the “third phase” of devolution, if approved by a referendum. Its purpose was not to change the VAT treatment of social care in Wales, should the National Assembly for Wales choose to pass Measures regulating it. It was not the purpose of the GWA 2006, as originally enacted, to alter arrangements in relation to taxation in Wales. That is apparent from the discussion in Agricultural Sector (Wales) Bill. It is also apparent from the text of GWA 2006, where the only references to taxation are:

I am abundantly sure of the following:

No reason has been advanced to the contrary by Cascade, to suggest a rationale why it might have been a deliberate policy choice to standard-rate welfare services that were regulated pursuant to an Act/Measure of the National Assembly for Wales.

From the structure of Note 8 it is abundantly clear that the provision that Parliament would have made would have been to add an item in the definition of “Act”:

“(h)

an Act or Measure of the National Assembly for Wales”

The only thing relating to the provision that would have been made which I am not abundantly sure of is where it would have been located in the list, whether it would have been a new item (h) tagged to the end of the list, or inserted elsewhere, say after the reference to the Scottish Parliament as item (ba). However, wherever it was inserted the effect would have been the same.

It is Parliament’s role to legislate. The role of this Tribunal in confined to interpreting Parliament’s enactments. Very considerable caution is required before concluding it is appropriate, as an act of interpretation, to add words to correct an obvious drafting error.

However, I have reached the view that this is one of those very rare occasions where it is permissible, and indeed required of me, to read words into legislation to correct an obvious drafting error.

The insertion is not too big, it simply completes a list of institutions reflecting devolution arrangements as they now prevail in the UK.

Further, the subject matter is not penal, it is concerned with the appropriate charging of VAT in a consistent and comprehensive manner across the nations of the UK.

While I find for HMRC on this basis, for the reasons set out above, there are two parts of their argument I reject.

HMRC suggest since the 2002 Order was made by negative resolution, being laid before Parliament on 20 March 2002 and coming into force the following day, such a correcting interpretation is particularly apt. In support of this they rely on the speech of Lord Mance in R (Noone) v Governor of Drake Hall Prison [2010] UKSC 30; [2010] 1 WLR 1743 at [75].

Whilst I accept delegated legislation which has had limited parliamentary scrutiny is more readily amenable to correction for drafting error, I do not consider such considerations carry any weight in this case. This is because the error was not in the 2002 Order. When the 2002 Order was made the GWA 2006 had not been enacted. Accordingly, the National Assembly for Wales had no powers to pass primary legislation – it could only pass subordinate legislation in place of the Secretary of State. There was therefore no drafting error in omitting the National Assembly for Wales at that time – any subordinate legislation it passed would be pursuant to a UK Act of Parliament and so covered by the definition of “state regulated”.

As noted HMRC seek to rely on the explanatory note to the 2002 Order. So far as is relevant to Item 9 it states:

“The effect of this Order is to specify the types of organisations that are entitled to exemption for the purposes of item 9 of Group 7 (welfare services) as well as the types of services the supply of which can be exempted under that item. In addition, the Order amends item 4 to enable provision to be made in a new Note (7) for a consistent interpretation of what is now termed a ‘state-regulated’ institution in both item 4 and item 9.

…

Article 4 substitutes a new item 9 (welfare services) which removes the requirement that supplies be made otherwise than for profit. Further, it provides that exempt supplies of welfare services can be made by state-regulated private welfare institutions, as well as by charities and public bodies.

Article 5 substitutes a new Note (6) (definition of welfare services) which inserts a reference to care within the exemption for services directly connected with children and young persons. Further, it provides that, in the case of services supplied by a state-regulated private welfare institution, the only services that are included within the exemption are services in respect of which the institution is regulated.

Article 6 inserts a new Note (7) to provide a common definition of “state-regulated” for the purposes of the institutions referred to in items 4 and 9.”

I find it to be of no assistance, and so neutral on the issue.

This is sufficient to determine the appeal in favour of HMRC. As I heard arguments on updating construction and conforming interpretation I also consider them briefly.

As Lord Bingham made clear in Quintavalle at [10] the always speaking principle is separate “from statements made in cases where there is said to be an omission in a statute attributable to the oversight or inadvertence of the draftsman.”

In News Corp UK & Ireland Ltd v Revenue and Customs (“News Corp”) [2023] UKSC 7, [2023] STC 446 Lord Hamblen and Burrows (with whom Lords Hodge and Kitchin agreed) described the always speaking principle as follows at [29]:

“What is meant by the always speaking principle is that, as a general rule, a statute should be interpreted taking into account changes that have occurred since the statute was enacted. Those changes may include, for example, technological developments, changes in scientific understanding, changes in social attitudes and changes in the law. Very importantly it does not matter that those changes could not have been reasonably contemplated or foreseen at the time that the provision was enacted.”

They then discussed a series of cases where it had been applied. None of those cases however, concerns reading words into a prescriptive list, adding a category of cases to a definition that is not in that list. Rather, they involve conventionally interpreting words, and phrases.

Applying Lord Wilberforce’s test, the National Assembly of Wales would fall within the “same genus of facts” as the other legislatures that are expressly mentioned in Note 8, and for the reasons I have given above there would be a “clear purpose in the legislation” that would be fulfilled by reading in the National Assembly of Wales. However, I have reached the view that the “strictness” of the words of Note 8, with the definition of “Act” formulated as a prescriptive list, does not allow “an Act or Measure of the National Assembly for Wales” to be read into Note 8.

As such the always speaking principle does not assist HMRC in this case.

I have already found that Cascade’s services fall within Item 9, applying Inco Europe. Consideration of a conforming interpretation is therefore unnecessary to dispose of this appeal. That is evident from News Corp, where the Supreme Court accepted that the issue was to be first determined on domestic rules of interpretation, without regard to considerations of fiscal neutrality.

However, as I have heard argument on the point, I address the issue in case the decision is appealed.

The parties are in agreement with regard to the legal tests to be applied. They accept HMRC (being a state party) cannot rely on direct effect of the Principal VAT Directive. However, they agree that HMRC may benefit from a conforming interpretation in accordance with Marleasing. For this to apply it is both necessary that (i) treating Cascade’s supplies as standard rated would breach EU law; and (ii) it is possible to interpret the legislation in conformity with EU law, applying the tests in Vodafone 2 and Ampleaward. Where the parties diverge is the application of these principles to the facts of this case.

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

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

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

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

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

…

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

…

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

…

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

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

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

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

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

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

…

LIFE's third submission and TLC's contention

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

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

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

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

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

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

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

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

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

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

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

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

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

It is common ground that, notwithstanding the UK’s departure from the EU, s 28 Finance Act 2024 preserved the obligation under Marleasing to interpret VAT legislation in conformity with EU law so far as possible.

As was explained in Vodafone 2 at [37] “the obligation on the English courts to construe domestic legislation consistently with Community law obligations is both broad and far-reaching”, and in particular, (a) it is not constrained by conventional rules of construction; (b) it does not require ambiguity in the legislative language; (c) it is not an exercise in semantics or linguistics; (d) it permits departure from the strict and literal application of the words which the legislature has elected to use; (e) it permits the implication of words necessary to comply with Community law obligations; and (f) the precise form of the words to be implied does not matter. The limits on a conforming interpretation are that (a) the meaning should go with the grain of the legislation and be compatible with the underlying thrust of the legislation being construed; and (b) not require the courts or tribunals to make decisions for which they are not equipped or give rise to important practical repercussions which the court is not equipped to evaluate: Vodafone 2 at [38]. A conforming interpretation in accordance with Marleasing therefore allows a “highly muscular approach to the construction of national legislation”: Test Claimants in the FII Group Litigation v IRC [2012] UKSC 19; [2012] STC 1362.

Here I consider a conforming interpretation is possible, by reading in “(h) an Act or Measure of the National Assembly for Wales” to Note 8. Whilst this is a departure from the strict and literal application of the words, such a highly muscular approach is allowed under a conforming interpretation. It clearly goes with the grain of the legislation, as it is adding an item of the same genus to the list already in Note 8. It is not contra legem, in the sense of contradicting and being irreconcilable with the very wording of the national provision at issue: HMRC v Ampleaward Ltd [2021] EWCA Civ 1459; [2021] STC 2260 at [95]. I note that this is also consistent with the approach of Judge Beare in JD Wetherspoon PLC v HMRC [2025] UKFTT 658 (TC), where he found a conforming interpretation capable of adding the word “cider” to a prescriptive list of other alcoholic beverages.

Cascade say a conforming interpretation would be too far reaching:

“Further, the effect of adding a new type of Act would be potentially far-reaching. The definition of ‘state-regulated’ in Note (8) is used by Item 4 (care or medical or surgical treatment and certain goods) as well as Item 9. If Acts of the Welsh Assembly were added to Note (8), the Welsh Assembly could extend the exemptions simply by choosing to regulate additional services. Whether the Welsh Assembly is to have that power (in the same way as the Scottish Parliament or the Northern Ireland Assembly) is [a] matter of political choice.”

However Parliament chose to give the National Assembly for Wales the power to make such regulation. In those circumstances extending the exemptions to include goods and services so regulated, in the same way that it extends to regulation by the Scottish Parliament or the Northern Ireland Assembly, is not too far reaching.

Accordingly if I had not found for HMRC on the basis of correcting a drafting error, applying Inco Europe, I would have found in favour of HMRC on the basis of a conforming interpretation.

I have found there to be a drafting error in GWA 2006. However, applying Inco Europe,I have found it possible to read in “(h) an Act or Measure of the National Assembly for Wales” to Note 8. So reading Note 8 results in Cascade’s supplies falling within the exemption in Item 9. It therefore follows that I dismiss Cascade’s appeal.