The recent Tribunal decision in Cascade Care Ltd v HM Revenue & Customs considered the VAT exemption for medical care, but in an unusual reversal of roles, it was the taxpayer arguing that part of its income should be subject to VAT rather than exempt.

Most VAT disputes involving healthcare focus on whether supplies fall within the VAT exemption for medical or welfare services. In this case, the position was different. Cascade Care accepted that much of its activity involved the provision of mental health care, but argued that certain elements of its services fell outside the exemption and therefore attracted VAT at the standard rate.

This approach was commercially advantageous. By charging VAT on those elements, Cascade Care could pass the VAT cost on to the commissioning body and, in turn, recover input VAT incurred on related costs that would otherwise have been irrecoverable under the exemption. 

Why the VAT exemption mattered in this case

Under UK VAT legislation, supplies of medical care are exempt where they are provided by a suitably qualified or regulated body and meet the conditions set out in the legislation. One of those conditions is that the services must be supplied under state regulation.

Exemption from VAT removes the requirement to charge VAT on income, but it also restricts the ability to recover input VAT on costs linked to making those supplies. For organisations operating in the healthcare and welfare sector, this can result in substantial irrecoverable VAT, particularly where operating costs are high.

Cascade Care’s argument focused on this point. By bringing certain services outside the scope of the exemption, the company could charge VAT on its supplies and recover input VAT on associated expenditure, improving its overall VAT position.

The taxpayer’s argument: state regulation in Wales

Cascade Care provided mental health services in Wales. Its position was that those services were delivered under legislation enacted by the National Assembly for Wales, rather than under legislation passed by the UK Parliament.

At the time the relevant VAT exemption was drafted, the definition of “state regulation” referred only to regulation under UK Acts of Parliament. Acts of the National Assembly for Wales were not included within that definition.

The taxpayer argued that, as a matter of strict statutory interpretation, regulation under Welsh legislation did not meet the condition for exemption. On that basis, the services should fall outside the VAT exemption and be treated as taxable supplies.

From a technical perspective, this argument was accepted as correct. There was no dispute that the wording of the legislation did not expressly include Welsh primary legislation within the definition of state regulation.

The Tribunal’s view: legislative intention versus drafting

Despite accepting the technical accuracy of the taxpayer’s interpretation, the Tribunal dismissed the appeal.

The Tribunal considered the historical context in which the VAT legislation had been drafted. When the exemption was originally enacted, Wales did not have the power to pass primary legislation. As a result, there was no need at that time to refer to Welsh Acts within the definition of state regulation.

When legislative powers were later devolved to the Welsh Government, the VAT legislation was not updated to reflect that change. The Tribunal concluded that this omission was a drafting oversight rather than a deliberate exclusion.

On that basis, the Tribunal held that the intention of the legislation had always been that services of this nature, when provided under state regulation in Wales, should fall within the VAT exemption. Allowing the taxpayer’s argument would have produced a result that was inconsistent with that intention.

The outcome and its wider implications

The appeal was dismissed, and the supplies in question remained exempt from VAT. As a result, Cascade Care was not permitted to charge VAT on the services and could not recover input VAT on costs attributable to those exempt supplies.

This case illustrates that VAT outcomes are not determined solely by commercial preference or even by a narrow reading of legislative wording. Tribunals will consider legislative intent, particularly where it is clear that later constitutional changes were not reflected in earlier drafting.

For organisations operating in healthcare, welfare and similar sectors, the case highlights the limits of using VAT liability arguments to improve input VAT recovery. Even where a technical argument appears strong, it may not succeed if it produces an outcome that conflicts with the purpose of the exemption.

Reviewing the VAT liability of healthcare and welfare income

The VAT treatment of medical and welfare services involves a number of nuances, particularly where services are commissioned by public bodies, delivered across different parts of the UK or include a mix of activities with differing VAT outcomes.

Establishing whether supplies are exempt, taxable, or partly taxable depends on a detailed review of factors such as:

• How services are regulated and delivered.
• The nature of the contractual arrangements with commissioners.
• How costs relate to different income streams.