Regulation of welfare services in devolved states

The taxpayers provide day care to vulnerable adults with learning difficulties. These services were subject to VAT unless the providing body is ‘state regulated’. In England and Wales there is no regulation but day care services are regulated in Scotland so are exempt from VAT.

The First-tier Tribunal decided this distinction created a breach of fiscal neutrality so HMRC appealed.

The Upper Tribunal agreed with HMRC that the difference in treatment arose from the regulation of day care not from the VAT legislation. The EU gave member states a discretion under the Principal Directive Art 132(1)(g) on whether to exempt welfare services provided by public bodies. The UK chose to exercise this discretion in VATA 1994 Sch 9 group 7 item 9 by exempting state-registered bodies. The fact that as a result of its devolutionary powers Scotland was able to regulate day care services was...