HER MAJESTY S REVENUE and CUSTOMS Respondents

19095

Value added tax – zero-rating – charities, etc – whether goods used in laboratories were “laboratory equipment” - yes

LONDON TRIBUNAL CENTRE

RESEARCH ESTABLISHMENTAppellant

- and -

HER MAJESTY’S REVENUE AND CUSTOMS Respondents

Tribunal: Dr. David Williams (Chairman)

Sitting in London in private

DECISION

1On the joint application of the parties the tribunal, having considered the terms of the Value Added Tax Tribunal Rules 1986, ruled that all stages of this appeal should be in private and that all identification details in the decision and directions of the tribunal should be anonymised.

The issue in dispute

2The appellant research establishment (“RE”) conducts medical research. For this purpose it maintains research laboratories. It arranged, under a staged payment contract, for contractors to replace what was referred to by the parties as an air ventilation system (referred to in this decision as “the Equipment”, it being agreed by both parties that the system was for these purposes equipment) for part of a laboratory complex. RE took the view that the supply and installation of the Equipment was a supply of laboratory equipment and should, as the other relevant conditions were met, be zero-rated for value added tax (VAT) purposes. The respondent Commissioners (then the Commissioners for Customs and Excise, and referred to in this decision as “Customs”) did not agree. RE reconsidered its position, and took the view that if the Equipment was not laboratory equipment, then it should properly be viewed as accessory to laboratory equipment. An officer of Customs viewed the laboratory complex, but concluded that the Equipment was neither laboratory equipment nor accessory to such equipment. In consequence it was decided that the supply and installation of the Equipment was liable to VAT at the standard rate. RE appealed that review decision. The issue for the tribunal is therefore whether the Equipment is either laboratory equipment or accessory to such equipment.

The appeal

3The tribunal, which included a member with directly relevant professional experience, held an oral hearing of the appeal at which both parties were professionally represented. The tribunal was shown extensive documentary evidence, and heard oral evidence or received formal written evidence from key members of RE’s staff, from the design consultant who advised RE on the design and installation of the equipment, and from Customs’ review officer. It was provided with full information by the parties, and was taken on a site visit that included seeing the Equipment as installed in a number of parts of the relevant laboratory complex. The tribunal records that it is satisfied that both parties provided the tribunal with full evidence and information on all matters relevant to its decision. It accepts that the oral evidence given to it for both parties was in each case given openly and without reservation to the extent that the witness could properly answer the questions asked. Accordingly the tribunal accepted the witness evidence including, to the extent relevant, the expert evidence of the design consultant on how the Equipment in this case compared to other air ventilation and air conditioning systems.

The law

4Section 30 of the Value Added Tax Act 1994 provides that the supply of goods and services is zero-rated only if a provision in Schedule 8 to the Act applies. It is common ground that only one such provision can apply in this case, namely Item 5 of Group 15 of Schedule 8. This includes within the Schedule:

The supply of any relevant goods to an eligible body which pays for them with funds provided by a charity or from voluntary contributions or to an eligible body which is a charitable institution providing care or medical or surgical treatment for handicapped persons.

It is common ground that RE meets all the conditions laid down in Item 5 save only whether the Equipment is a “supply of any relevant goods”. The tribunal therefore considered only that aspect of Item 5.

5Note 3 to Group 15 offers a definition of “relevant goods”. RE contends that the equipment is within either paragraph (a) or paragraph (c) of that definition. These are:

(a)medical, scientific, computer, video, sterilising, laboratory or refrigeration equipment for use in medical or veterinary research, diagnosis or treatment.

And

©parts or accessories for use in or with goods described in paragraph (a) …

6That definition is one that has been modified from time to time both to take account of previous tribunal decisions and in the light of experience. As the effect of those changes has been to broaden the test and at the same time deal with what were seen as weaknesses in the original terms, the tribunal considers it relevant to note the original version. This was considered by a tribunal chaired by the then President, Lord Grantchester QC, in Clinical Computing Ltd v The Commissioners, [1983] VATTR 121. At that time, paragraph (a) was:

(a) medical or scientific equipment solely for use in medical research, diagnosis or treatment;

and what is now paragraph © was:

(d) parts and accessories designed solely for use in or with goods described in paragraph (a) … above.

It can be seen that the definitions have been expanded both in the list of specific kinds of equipment and in the kinds of activities for which the equipment can be used. The first of those expansions was as a result of the Clinical Computing case itself, as the tribunal in that case ruled that the then description did not cover computer equipment but took its decision “with some regret”. The other significant alteration is the removal from the test of the restriction to equipment “solely” for use as defined. In the tribunal’s view the removal of that link leaves the use of the equipment as a question of fact. It also removes, as a matter of law, the definitional linkage between equipment and its use.

7In this case it is common ground that the Equipment was used for a purpose within Item 15, so the tribunal does not have to consider that question further. It needs to consider only if the Equipment was “laboratory equipment” or “accessory” to such equipment.

8In doing so, the tribunal accepts two propositions put to it for Customs. First, its task is to interpret, and not to rewrite, the Item. As was noted in argument, a number of tribunals have expressed views about the extent of the Item. Parliament responded directly to some of these comments. But it is not for the tribunal to take that legislative duty on itself. Second, and linked with this, there is a restraint on Parliament because of the nature of zero-rating. It is a derogation from the terms of European Union VAT law authorised only by Article 28 of the EC Council Sixth VAT Directive. For this reason the Item, as part of that derogation, should not be interpreted or applied too liberally.

9The related question of whether goods were “medical equipment” was considered by Owen J in Customs and Excise Commissioners v David Lewis Centre [1995] STC 485. The factual issue in disputes was whether certain two-way observation windows were, to use the term in the judgment, “medical goods”. The case was argued before Owen J only by Kenneth Parker QC for Customs, and not by the Centre, and the judgment is, perhaps for that reason, brief. The relevant part of it is:

“The question becomes: were the windows when supplied medical goods? The way in which the tribunal approached this matter was to say that clearly the function was medical and therefore the goods were medical. Mr Parker argues that that is not the correct interpretation of that which is contained in Sched 5. The goods, he says, must not only be intended for exclusive use in medical diagnosis or treatment (I omit the words which are not relevant here), but also they must be designed for such use. In other words, there is a test which is twofold; first, the goods must be medical; and secondly they must be supplied for use in one of the medical areas which is set out in the definition. Clearly “medical” must be given some meaning. If the meaning was that any goods which are for use in diagnosis or treatment are to be considered as medical goods, then it would not be necessary to add the words after medical, “scientific, computer, video” since clearly if a computer was supplied for use in diagnosis, then it would be a medical good supplied in accordance with Group 16 [now Group 15]. Therefore there must be some meaning to “medical”….

The way in which the tribunal in Clinical Computing Ltd dealt with the matter was this. It was accepted, it was said, by Customs, that the computer system – at that time the word “computer” did not appear in the definition of “relevant goods” – had been supplied solely for use in medical research, diagnosis or treatment, but the decision had been that the computer system was not medical or scientific equipment because it had no specialised feature identifying and limiting its use to the medical or scientific field and could be used for other purposes. The tribunal held that it was necessary to consider the state of the system at the time of the supply, to consider how it is used or operated and to decide whether, against that background, the system can be described as “medical or scientific equipment” giving the words their normal everyday meaning …

As I see it, the question which I have to ask myself is this: at the time of the supply (by all means bearing in mind what the supply was for), could these two-way mirrors sensibly be described as “medical goods”? Bearing in mind the dual test which is necessary, it seems to me that is it not possible to describe the windows as “medical goods”. They were goods, certainly, which were to be used for diagnosis and treatment, but they were not medical goods…”

10 The tribunal was also taken to the decision in Clinical Computing Ltd. It has already noted that at that time the second of the tests was that of “sole use” and not merely “use”, although the issue was not in factual dispute in the case. Against that background the tribunal commented:

“The only guide to the construction of item 4(a) [now Note 3(a)] by the wording thereof is the indication that note all equipment “solely for use in medical research, diagnosis or treatment” is to be zero-rated on a supply thereof, but only such equipment as is also “medical or surgical [sic: this should read “scientific”]equipment”

In applying that test, the tribunal put some weight on the fact that the computers in question could be reprogrammed after the time of supply “to perform non-medical functions without any considerable change”.

11 These authorities were considered recently by a tribunal in Supplier Ltd v Customs and Excise Commissioners (2002)VAT Decision 18247. Some of the items subject to consideration in that appeal were argued to be laboratory equipment. The tribunal commented:

“42In considering whether protective gloves, footwear, face masks, suits and helmets are laboratory equipment we again apply the principle in David Lewis Centre which is that, in order to be identified as specified equipment, goods must have some specialised feature identifying and limiting their use to the specified field and should not be capable of being used for other purposes. It is necessary to consider the goods at the time of the supply and decide whether, against that background, the goods could be described as the specified equipment giving those words their normal everyday meaning.”

12For the purposes of this case, the tribunal does not consider that it need do more than follow that approach when evaluating the equipment. It indicated at the oral hearing that it had some concerns about whether the tests in and after David Lewis Centre carried too much of the flavour of the “solely” test that was necessarily part of the thinking of the tribunal in Clinical Computing Ltd. But bearing in mind the facts of this case, and the extent of agreement between the parties about both the use of the goods and the purposes of RE in using them, it does not arise for further consideration here.

What is equipment?

13Before turning to the tribunal’s own findings and evaluation, it is useful to consider how the two parties themselves labelled and treated the Equipment.

14The tribunal was shown the contract under which the contractor supplied the Equipment. The contract itself refers only to “the works”, and sets out, by way of a “brief description of the works” a 32-item bullet-marked list of goods and services to be provided. It is clear from the contract details and other evidence that some of the items could be purchased ready-made from suppliers but that other items were to be made for RE to specific individual designs. Further, as the design consultant confirmed in evidence and as the tribunal fully accepts, the assembly and installation of the various parts of the Equipment into a whole system was specifically designed for the particular laboratory complex and was emphatically not, in the consultant’s words, “a scissors and paste job”. It was rightly termed “bespoke”.

15The tribunal is enjoined to evaluate the Equipment not as listed in the contract but at the time of supply. It was common ground that the contract provided for supply in stages, but that it was appropriate to consider the time of supply as the time when the Equipment was installed and handed over, subject to any later adjustments under the contract. With that in mind, the tribunal consider that the parties were both correct in arguing the case on the basis that the Equipment should be viewed as a whole and not by reference to various constituent parts.

16Customs based their view of the Equipment, judged as a whole, on their published guidance 701/6, and the tribunal was shown the version of that guidance from September 2003 (although an earlier version would have been published at the time of supply). Part 4 of that guidance describes, under the heading “qualifying goods and services” the meaning of “relevant goods”. At paragraph 4.2.1 it answers the question “what is equipment?”:

“Equipment is articles designed or used for a specific purpose. It will usually be durable, although certain disposable items, such as syringes that are designed to be used once only, may still be equipment.”

17RE contended that the Equipment was “equipment”, although in evidence for RE the design consultant referred to the Equipment as “plant”. In answer to questions, the consultant categorised most of the installation that the consultant had overseen as plant and distinguished it from what, in the consultant’s view, was properly called the laboratory equipment. But it was accepted for Customs that this was not the phraseology of the legislation, and that the Equipment was “equipment” although, it was submitted, - but for a different reason to that of the consultant – not laboratory equipment. The tribunal agrees that it was equipment.

18In paragraph 4.2.8 the guidance answers the question “what is laboratory equipment?”:

“This includes equipment (see paragraph 4.2.1) that is designed for use in a laboratory, such as test tubes and other laboratory hardware; Bunsen burners; fume cupboards; microtomes; cryostats; laboratory benches; specialised sinks and catchpots.

The following are not laboratory equipment:

- ordinary cupboards, lockers, seats and other furniture, even when these are used to equip a laboratory;

- bulk materials …

- general purpose items used to equip a laboratory; and

- consumables…”

19 The tribunal emphasises that it does not sets out this notice because it has any force of law. It is of course only the view of one party, although as Neuberger J commented of another part of the notice in Royal Midland Counties Home for Disabled People v Customs and Excise Commissioners [2002] STC 395 at 400 it is a “good working definition”. The tribunal quotes it because that is the basis on which Customs approached their decision. Indeed, in fairness, those acting for RE also deployed the wording of the notice at one stage, as the following passage in Customs’ decision letter indicates:

“You described the ventilation system as a “bespoke stand alone unit designed to conform to the strict standards required for laboratory and biomedical use” and that it should “qualify under the zero-rating provisions for laboratory equipment” much in the same way as “fume cupboards”, which are “specifically included within under the zero-rating provisions in HM Customs and Excise guidance”. However, as you are no doubt already aware “air conditioning units” are specifically excluded within the same provisions.”

… Laboratory equipment is defined as items designed with a specific purpose for use within a laboratory. A fume cupboard would fall within this description as it has the specific role of extracting dangerous gases during the course of a specific process. From examining the “description of the works” and the design criteria it is apparent that the new ventilation system although crucial to the work undertaken … is really no more than a very precise and advanced air-conditioning unit and would not therefore qualify for zero-rating.”