HMRC Vs Cheshire Centre for Independent Living (CIL)

VAT Exemption on Provision of Payroll Service – does this fall under the exemption in the VAT Act 1994

In a recent first tier tribunal case Cheshire CIL was in dispute with HMRC over the VAT treatment of charges made to disabled people for the running of a payroll service.  The judge found in favour of Cheshire CIL and decided the service was “closely linked to welfare” and as such fell under the welfare services exemption in Schedule 9 Group 7 Item 9 VATA 1994.


Many disabled people may need a carer and they are encouraged to engage directly with their carer, so they become an employer.  Cheshire CIL and other charities get involved in a number of ways and one of which is to offer to manage the payroll on behalf of the disabled person for their carer.  In most case this means running a payroll service for just one employee so charities such as Cheshire CIL will do this on behalf of numerous disabled people as well as managing their direct payments.  In these cases, as a consequence of the disability of the customer, extra guidance and help is needed. So this is not a standard payroll service.  It is the charges made for this payroll service that are at issue in this case.  HMRC said the supplies were standard rated, whereas the charity says they are exempt as a supply closely linked to welfare. 

The first-tier tribunal decided in favour of Cheshire CIL.

Basis for decision

The charity’s argument was that in this case you should not seek only to assess the objective content of a service, divorced from the capacities of its recipient, but should consider what the service means to that recipient.  It is the nature of the need that determines if it is welfare.  They argued the exemption applies solely to charities making supplies to people in certain special classes which denote some form of social security aspect.  The tribunal accepted this.

The tribunal accepted the view that, without the payroll service, the disabled user would not have the capacity to engage the carer.  If charged VAT for the service, the user’s benefits payment would be reduced by the VAT charge leaving them less to use to pay for the carer’s time, thus reducing the level of welfare.  It also accepted that the service was only relevant as a result of the need for care services and was “closely linked” with welfare activity.  It merely better enabled enjoyment of the supply of welfare by the carer, which (HMRC agreed) was, in itself, an exempt welfare service.  The intention behind the welfare exemption was served by exempting this service, as it was part and parcel of the care provision.

The tribunal agreed that the service was ‘ancillary’ to the welfare supply in the manner discussed above, to give a basis for the exemption.

Going forward

The judgement was handed down on 3rd June 2019 and leave of appeal was granted to HMRC who have 56 days to appeal against the decision.

Further Advice

If you would like to discuss this article in more detail or you would like to speak with a member of our team, please on 01772 821021 to be put in contact with a member of our Specialist VAT Advisers team.