NHS Ayrshire and Arran Health Board v The Commissioners for HMRC

The supply in the course of the construction of–

a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose; or

…

of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.

Use for a relevant residential purpose means use as—

except use as a hospital, prison or similar institution or an hotel, inn or similar establishment.

Where—

then in the case of—

We do not accept that psychological intervention and therapy ceases at the entrances to the Bedroom Wing. Whereas they may not be explicitly carried on in the Bedroom Wing, in the same way that some treatment would be carried out in a therapy room, FB [Fraser Bell, a witness for NHS Ayrshire] stated, 'the design of the space focuses upon contemplation and relaxation'. We consider that contemplation and reflection following types of treatment such as CBT forms part of the patients' medical treatment.

In addition, it is clear that any medicine or medication given to patients continues wherever the patients are and is not confined to specific areas. The description of "a typical day" says that the Bedroom Wing may be used for the types of activity which comprise the 2003 Act definitions of habilitation and rehabilitation in its definition of 'treatment'.

the Bedroom Wing is a hospital or similar institution, and is used as such as part of the complex (FTT [299], [311], [323]);

the Bedroom Wing was not intended for use solely for a relevant residential purpose within Note (4) (FTT [322]);

although Note (10) permits partial zero‑rating where part of a building is intended solely for qualifying use and part is not, Note (10) had no application on the facts because no part of the complex, including the Bedroom Wing, was intended for use solely for a relevant residential purpose (FTT [324]-[327]).

Ground 1: The FTT erred in law in concluding that the Bedroom Wing was not a ‘part of a building’ within Note (10) at [327] of the Decision. The FTT should have held that the Bedroom Wing was a ‘part of a building’ for the purposes of Note (10).

Ground 2: The FTT erred in concluding that the intended use of the Bedroom Wing did not fall within any of Note (4)(a) to (g). It erred in relying on the reasons that: (i) not all the normal activities of living could take place there because the residents could not take meals in the Bedroom Wing and (ii) medical treatment took place there. The FTT should have held that the Bedroom Wing comes within either Note (4)(a) or (b) or (g) namely:

Ground 3: The FTT erred in concluding that the intended use of the Bedroom Wing (with or without the common kitchen and dining areas) is ‘use as a hospital’ so as to exclude the relevant construction supplies from zero-rating. The FTT should have held that a relevant residential purpose is the ‘sole’ (or alternatively, primary) intended use of the Bedroom Wing so that it does not fall within the exception for use as a hospital or similar institution in Note (4).

The point was not part of NHS Ayrshire’s case before the FTT. In its initial claim made to HMRC, and in the initial stages of its appeal to the FTT, NHS Ayrshire’s case was that the construction services in relation to the whole complex were zero-rated. NHS Ayrshire’s case was subsequently limited to the cost of services provided in relation to the construction of the Bedroom Wing and had been so limited for some considerable time before the FTT hearing. From the documents in the hearing bundle, NHS Ayrshire’s case has been restricted to matters relating to the Bedroom Wing since, at the latest, August 2023 – some 16 months before the FTT hearing in December 2024 – when a submission to that effect was made to HMRC.

This is not a point of law that requires no new evidence. The evidence before the FTT was focused on the use of the Bedroom Wing. The documentary evidence before the FTT included plans distinguishing the different areas within the complex, showing the Bedroom Wing as a separate and distinct part of the building. It did not distinguish the common kitchen and dining areas in the same way from other parts of the building. The witness evidence was also focused on the use of the Bedroom Wing. The witnesses were cross-examined on that basis. If we were to admit the new point, we would need to revisit that evidence.

Although the tribunal has powers to require the submission of evidence and the attendance of witnesses, if we were to admit the new point, the hearing of the appeal would have to be adjourned to permit the filing of that evidence and to provide for the attendance of witnesses at a further hearing so that they could be cross-examined on their evidence. That would disrupt the appeal process and would materially prejudice HMRC. It would also allow the appeal to be relitigated on a basis that was not before the FTT. We are reminded of the comments of Lewison J in Fage UK Ltd and another v Chobani UK Ltd and another [2014] EWCA Civ 5 (at [114]) that the “trial is not a dress rehearsal” affording taxpayers a second bite of the cherry to pursue arguments that could have been, but were not, put before the FTT. It cannot be in the interests of justice to do so and, in our view, would not be in accordance with the overriding objective to deal with cases fairly and justly.

The FTT should have determined that the Bedroom Wing was “part of a building” before then proceeding (see Grounds 2 and 3) to consider whether that part was used solely for a relevant residential purpose and whether the exception in Note (4) applied.

The correct test in Note (10) is a physical and spatial one: whether the relevant area is capable of being identified as a discrete part of a building. The Bedroom Wing was plainly a distinct and identifiable part of a building.

The VAT Tribunal decision in University Court of the University of St Andrews v Customs & Excise Commissioners (2005) VAT Decision 19504 (“St Andrews”) and the FTT decision in New Deer Community Association v HMRC [2014] UKFTT 1028 (TC) (“New Deer”) (which was affirmed by the UT – see [2015] UKUT 604 (TCC)) served as examples of the correct approach and demonstrated that individual rooms or identifiable areas within a building may constitute “part of a building” within Note (10) with a relevant residential purpose even where the building as a whole was designed for a purpose which was not a relevant residential purpose.

Any connection in use or purpose between the part of the building in question (the Bedroom Wing) and the building as a whole is irrelevant to the analysis. If that were not the case, Note (10) would be deprived of much practical effect.

For the purpose of Note (10), the FTT had to decide if the Bedroom Wing was “part of a building… intended for use solely for a relevant residential purpose”. The references in the FTT Decision (e.g. at FTT [327]) to the Bedroom Wing being an “integral and inextricable part” of the building complex were directed to its use, not to whether it was part of a building for the purpose of Note (10).

The FTT did not decide that the Bedroom Wing was not a “part of a building”. On a fair reading of the FTT Decision as a whole, the FTT proceeded on the basis that the Bedroom Wing was part of the NSAIS building but concluded that Note (10) could not apply because no part of the building was intended for use solely for a relevant residential purpose.

The decision of the VAT Tribunal in University of St Andrews and the decision of the FTT in New Deer did not support NHS Ayrshire’s case. There was no dispute in either case as to whether any particular room or area was “part of a building” for the purposes of Note (10).

The substantive issue before the tribunal is to determine whether NSAIS is a hospital or similar institution in which case supplies are not zero-rated, or whether the Bedroom Wing, which surrounds, on three sides, a therapy court and which was marked in yellow on a site plan ("the yellow zone/accommodation wing") submitted to the tribunal, is a distinct and separate part of the building designed or intended to be used solely for a RRP, in which case zero rating is granted.

The findings of fact made by the FTT are directed at the functionality of the Bedroom Wing and other parts of the complex considered separately: the findings refer to “zones” within the complex (see for example FTT [34], FTT [59]), and the distinct and separate functionality and use of the Bedroom Wing (see for example FTT [68] and FTT [74]).

The analysis of the use and purpose of the Bedroom Wing is equally conducted by reference to the distinct functionality of the Bedroom Wing itself (see FTT [296]-[304]).

We find that it is artificial to claim that the Bedroom Wing is intended for use solely for a RRP. It is an integral and inextricable part of the Building Complex whose intended use is a hospital or similar institution primarily to deliver medical treatment to patients under Part 16 of the 2003 Act and protect the staff and public whilst doing so. Accommodation and education are ancillary activities which are necessary only to deliver the medical treatment and security required in view of the practicalities of delivering that medical treatment and taking account of the legal entitlements of the patients given their ages.

…we find that the accommodation zone/Bedroom Wing is a hospital or similar institution and used as such as part of the Building Complex as a whole.

The VAT Tribunal in St Andrews, was concerned with the question as to whether certain parts of a facilities building which were for mixed use (i.e. partly for a relevant residential purpose and partly not) could fall within Note (10). The VAT Tribunal found that they could not.

In New Deer, the FTT was concerned with whether a sports pavilion could be regarded as intended for use for a “relevant charitable purpose” and so whether services supplied in the course of construction of the pavilion could be zero-rated (under item 2, Group 5, Schedule 8 VATA). The FTT decided that a meeting room and a kitchen within the pavilion could fall within the scope of zero rating. But there was no issue before the FTT as to whether those rooms constituted part of a building.

By Ground 2, NHS Ayrshire asserts that the FTT erred in concluding that the intended use of the Bedroom Wing did not fall within any of Note (4)(a), (b) or (g).

By Ground 3, NHS Ayrshire asserts that the FTT erred in law in concluding that the intended use of the Bedroom Wing was “use as a hospital”.

In relation to Ground 2:

On any view, the primary use of the Bedroom Wing was as residential accommodation within Note 4(a) or (b).

The FTT’s principal reasons for holding otherwise were: (i) that not all activities associated with residential accommodation took place in the Bedroom Wing (FTT [296]-FTT [304]), and (ii) that medical treatment continued whilst patients were in the Bedroom Wing (FTT [279]-[281]).

The FTT erred in concluding that the Bedroom Wing could not fall within Note (4)(g) on the grounds that it was not the “residence” of the patients. For many patients, the Bedroom Wings was their only residence. They were required, by law, to reside in the Bedroom Wing. The reasons why they were required to reside there were not relevant to the enquiry.

In relation to Ground 3:

The Bedroom Wing was not intended for use “as a hospital… or similar institution”:

In relation to Ground 2:

The FTT was entitled to reach conclusions on the use of the Bedroom Wing in the context of the use of the complex as a whole, which was used as a hospital or similar institution.

NHS Ayrshire’s arguments failed to reflect:

The FTT was entitled to consider, as part of its multifactorial evaluation, the aspects of residential use that the Bedroom Wing lacked.

In relation to Ground 3:

The FTT was entitled to conclude as it did at FTT [323], [324], and [327], that the Bedroom Wing was intended for use as part of a hospital and that the exception to Note (4) would therefore apply.

The FTT was entitled to take into account:

Pennine decided that care homes may provide residential care which may involve the treatment and management of pre-existing conditions, and some form of medical treatment is likely to take place in any care home. The principal purpose of a care home, however, is not medical treatment whereas it is at NSAIS.

The Applicant states that no active care will be provided within the Bedroom Wing and that the staff may present and engage in 'normal human interaction'. The staff are trained nursing staff and not security staff. We consider that the requirement for a professional nursing qualification is both relevant and intentional and their interaction and observations form part of the patients' treatment, as defined in the 2003 Act.

We do not accept that psychological intervention and therapy ceases at the entrances to the Bedroom Wing. Whereas they may not be explicitly carried on in the Bedroom Wing, in the same way that some treatment would be carried out in a therapy room, FB stated, 'the design of the space focuses upon contemplation and relaxation'. We consider that contemplation and reflection following types of treatment such as CBT forms part of the patients' medical treatment.

In addition, it is clear that any medicine or medication given to patients continues wherever the patients are and is not confined to specific areas. The description of "a typical day" says that the Bedroom Wing may be used for the types of activity which comprise the 2003 Act definitions of habilitation and rehabilitation in its definition of 'treatment'.

Accordingly, we agree with the Respondents that in the case of NSAIS, the primary purpose is to treat patients so that they can be rehabilitated to a point where they are able to be reintroduced into society. The outcome for some patients may be that they will be cared for until they become adults and at such time they will be reallocated to an adult facility.

We find that nursing is part of medical treatment and that medical treatment, as defined in the 2003 Act, is delivered throughout the Building Complex, including the Bedroom Wing.

The Appellant says that NSAIS is the patients' home as it is where they live and emphasise the positive aspects from both care and treatment perspectives of the design of the bedrooms being the personal spaces of the patients. This includes a limited ability to lock their rooms, to decorate them and carry out certain activities there.

The examples of the daily activities in the "a typical day" document, albeit for staff and carers, indicate that access to the Bedroom Wing is limited throughout a 24-hour period and throws doubts on whether the Bedroom Wing is solely intended as a home or "residential accommodation", as opposed to the places where the patients sleep, use the ensuite bathroom facilities and can carry out a number of activities particularly if they are not required to attend schooling, and presumably during school holidays.

The Concise Oxford Dictionary defines "residential" as "suitable for or occupied by private houses" or "used as a residence" and defines "residence" as "the place where a person resides; an abode". It defines "accommodation" as a room for receiving people, especially a place to live or lodgings.

Although we consider that the Bedroom Wing is a hospital or similar institution, when considering the activities of daily living, which include dressing, toileting, washing, mobility, transferring and eating, as a useful measure by which to ascertain whether a building is accommodation or a home or a residence, there is one major activity of daily living that cannot be carried out in the Bedroom Wing and that is eating. This is caried out in the dining area or dining court.

Similarly, there are two lounges in the Bedroom Wing where the patients can "socialise" but given the precautions that have to be taken regarding which patients can enter and meet in the courtyard, onto which the Bedroom Wing faces, at any one time so as to avoid any potential conflicts or difficulties between different patients, this must also apply to the occupancy of the lounge areas.

When the patients meet their families this can only take place in areas that specifically does not include the Bedroom Wing.

These restrictions are such that the Bedroom Wing does not provide the normal attributes of residential accommodation or a home or a residence as they do not provide the occupants with the necessary facilities to live a domestic life independently.

The Bedroom Wing is where the patients sleep and can use the bathroom facilities, in many respects similar to a hotel or similar establishment.

Accordingly, we do not consider that the Bedroom Wing is used solely for a RRP as it is only a place for sleeping, bathing, toileting and some work or leisure activities and where access to them is restricted at times of the day.

Nevertheless, we prefer the Respondent's submissions on the inapplicability of notes (4) (a), (b), (d) and (g) because the conditions to which they refer are not met. Fundamentally we do not believe the Bedroom Wing is intended for use solely for a RRP, because we consider that it is artificial to consider that the Bedroom Wing is not part of the Building Complex which we consider in its entirety is a hospital or similar institution. Consequently Note 4 and Note 10 do not apply.

First, it has not been argued by HMRC at any stage that NSAIS is a “prison or similar institution” for the purposes of Note (4) notwithstanding that the patients have all committed criminal offences and are being detained in part for that reason.

Second, the NSAIS complex as a whole is a “hospital… or similar institution” for the purposes of Note (4). The NSAIS complex as a whole cannot fall within Note (4).

The meaning given to “hospital” in Note (4) is the ordinary meaning of that word (Fenwood [16]). Definitions of “hospital” and “medical treatment” in other statutory contexts are of little assistance. They may or may not reflect the meaning of “hospital” in Note (4) (Fenwood [14]-[15]).

Note (4) permits zero-rating for the construction of the residential accommodation, but zero rating is excluded if the building is a hospital i.e. an institution providing medical treatment and associated care. It is a product of the structure of Note (4) that some buildings, or parts of buildings, that contain what might otherwise be regarded as residential accommodation will fall within the exception because it is residential accommodation in a hospital, prison or similar institution.

In these cases, it is therefore necessary in each case to contrast the relevant paragraph of Note (4) with the relevant part of the exception. Sir Andrew Morritt C said this about the interrelationship of the various paragraphs in Note (4) and the exception and its consequences for the meanings of “residential accommodation” and “hospital or similar institution” in Note (4) (Fenwood [18]):

The submission to which Sir Andrew Morritt C refers in the passage above is a submission from counsel to the effect that “a hospital is a building used for treatment for the cure or amelioration of a medical condition as opposed to personal care; the former is likely to require short term occupation, the latter long-term residence” (Fenwood [13]).

First, in both cases, the exception in Note (4) was not relevant. In St Andrews, the other parts of the building were a facilities building for the University. The exception in Note (4) was not in point. New Deer was a case concerning Note (6) (relevant charitable purpose) to which there is no equivalent exception.

Second, even in St Andrews, the intended use of the parts of the building in question is not viewed entirely independently. Its context is important. The parts of the facilities building that qualified in St Andrews as residential accommodation within Note (4)(d) – a corridor, toilets and first aid room – could only qualify because of their proximity to and use as part of the related student accommodation.

There is no discussion in St Andrews of the issue that arose in Derby YMCA – to which Mr Mantle refers – of the requirement for certain of the paragraphs in Note (4) for the accommodation to be intended for use as a “home” or “institution”. Note (4)(d), the relevant paragraph in St Andrews, contains no such requirement.

whether the Bedroom Wing is part of a building for the purposes of Note (10);

whether any of the relevant paragraphs in Note (4) apply

whether the exception to Note (4) can apply.

First, even if it is convenient, in some cases, to break down the enquiry into its constituent parts, it is always necessary to have regard to the overall position. As we have discussed above, the application of Note (4) in cases where the exception may be in point requires the comparison between the relevant paragraph of Note (4) and the terms of the exception (Fenwood [18]). The position is no different when Note (4) is applied by virtue of Note (10).

Second, in our view, there will be circumstances where the determination of the use and purpose of part of a building for the purpose of Note (10) is informed by the use and purpose of the remainder of the building and/or the context of the location of the building or part of a building and the purposes for which relevant persons are accommodated there. The results of the tribunal cases (see, in particular, St Andrews) demonstrate this.

Mr Simpson KC refers to the fact that patients reside in the Bedroom Wing; they have no other residence. The thrust of that submission is that if a building (or part of a building) is the sole residence of the relevant person/s, then the intended use of the building (or part) must automatically be for a relevant residential purpose. No other factors can displace that conclusion. We do not agree. There is nothing in the statutory provision that suggests that relevant residential purpose is to be interpreted in that way. There is also nothing in the case law to support such an approach. Indeed, it is implicit in the structure of Note (4) that the exception can apply to a building or part of a building that would otherwise be regarded as residential. In our view, a holistic assessment of the evidence is required.

Furthermore, that submission ignores the fact that aspects of the patients’ daily living – including eating and meeting visitors – take place in other parts of the NSAIS complex. That complex as a whole is a “hospital… or similar institution” within the terms of the exception. This is not a case – such as that in St Andrews – where the activities that may be regarded as part of daily living and so relevant to determining whether accommodation is residential take place in other parts of the building or other nearby buildings the purpose of which do not fall within the exception.

If the Bedroom Wing is to meet the requirements of Note (4)(a), (b), or (g), in addition to being residential accommodation, it must be a “home” or “institution” (in the case of Note (4)(a) or (b)) or an “institution” (in the case Note (4)(g)). We take the FTT’s findings at various points in the FTT Decision that the Bedroom Wing is part of a single unit or facility (see for example, FTT [209], [229], [269]) as findings that the Bedroom Wing is not a self-standing “home” or “institution”. The only institution of which it is a part is NSAIS, which is a “hospital… or similar institution” within the exception.

As regards the issues surrounding medical treatment, the submission that the treatment that is given in the Bedroom Wing is not determinative of the use or purpose of that part of the building ignores the fact (as found by the FTT, FTT [280]-[281]]) that the treatment is a continuation of the treatment that takes place in other parts of the complex, which is a “hospital… or similar institution”. As the FTT found, the staff on duty in the Bedroom Wing are trained nurses and their observations feed into care and treatment plans of the hospital (FTT [315]-[316]). It is not possible to separate the treatment that is provided in the Bedroom Wing from the treatment that takes place in other parts of the complex. It is an integrated course of treatment.

Furthermore, the patients are present in the NSAIS complex and in the Bedroom Wing because they are detained in NSAIS to receive medical treatment. The patients are restricted in access to and use of communal areas (the lounges and courtyard) for security and protection). This is a different case from Fenwood and Pennine. In those cases, the primary purpose of the building in question was to provide care rather than treatment. In this case, as the FTT found, the primary purpose is to provide treatment (FTT [307]-[314]).

NHS Ayrshire also criticizes the references by the FTT to definitions of “hospital” and “medical treatment” in other statutes to which the FTT refers. Notwithstanding the references to which NHS Ayrshire points, it is clear from other parts of the FTT Decision (see for example, FTT [264]-[265]) that the FTT did not regard these definitions as determinative. However, the FTT was clearly entitled to take into account that NSAIS met the requirements of the legislation for the purpose of the making of orders regarding the detention of patients and the statutory purpose of that detention.

In comparing whether the intended use of the Bedroom Wing should fall within one of the paragraphs in Note (4) or the exception to Note (4) – the FTT was entitled to find that the Bedroom Wing was a hospital and that the exception must therefore apply.

For these purposes, given the interdependence of the use of the Bedroom Wing and the remainder of the complex, the FTT was entitled to take into account the use and functions of the remainder of the complex of which the Bedroom Wing forms part.