C-498/03 Kingscrest Associates and Montecello

JUDGMENT OF THE COURT (Third Chamber)

* 26 May 2005

In Case C-498/03,

REFERENCE under Article 234 EC for a preliminary ruling by the VAT and Duties Tribunal, London (United Kingdom), by decision of 10 June 2003, received at the Court on 26 November 2003, in the proceedings

Kingscrest Associates Ltd,

Montecello Ltd

v

Commissioners of Customs and Excise,

THE COURT (Third Chamber),

composed of A. Rosas, President of the Chamber, A. Borg Barthet, A. La Pergola, J. Malenovský and A. Ó Caoimh (Rapporteur), Judges,

* Language of the case: English.

Advocate General: D. Ruiz-Jarabo Colomer, Registrar: L. Hewlett, Principal Administrator,

having regard to the written procedure and further to the hearing on 27 January 2005,

after considering the observations submitted on behalf of:

— Kingscrest Associates Ltd and Montecello Ltd, by A. Hitchmough, Barrister, instructed by C. Mainprice, Solicitor,

— the United Kingdom, by K. Manji and C. White, acting as Agents, and N. Paines QC and P. Mantle, Barrister,

— the Commission of the European Communities, by R. Lyal, acting as Agent,

after hearing the Opinion of the Advocate General at the sitting on 22 February 2005,

gives the following

Judgment

Legal context and the dispute

1The request for a preliminary ruling concerns the interpretation of Article 13A(1)(g) and (h) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, hereinafter 'the Sixth Directive').

2The reference was made in the course of proceedings between, on the one hand, Kingscrest Associates Ltd and Montecello Ltd and, on the other hand, the Commissioners of Customs and Excise ('the Commissioners'), the competent authority in the United Kingdom for matters concerning value added tax ('VAT') in respect of the exemption from VAT of supplies made by Kingscrest Residential Care Homes ('Kingscrest'), a partnership formed by the appellants in the main proceedings for the purpose of operating residential care homes in the United Kingdom, whereas, according to them, those supplies should be subject to VAT.

Legal framework

Community provisions

3Article 13A(1) of the Sixth Directive provides:

'Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse:

(g) the supply of services and of goods closely linked to welfare and social security work, including those supplied by old people's homes, by bodies governed by public law or by other organisations recognised as charitable by the Member State concerned;

(h) the supply of services and of goods closely linked to the protection of children and young persons by bodies governed by public law or by other organisations recognised as charitable by the Member State concerned;

4Article 13A(2) of the Sixth Directive provides:

'(a) Member States may make the granting to bodies other than those governed by public law of each exemption provided for in (l)(b), (g), (h), (i), (1), (m) and (n) of this article subject in each individual case to one or more of the following conditions:

— the organisations in question shall not systematically aim to make a profit, but any profits nevertheless arising shall not be distributed, but shall be assigned to the continuance or improvement of the services supplied, National provisions

Provisions concerning the registration of persons operating residential care homes

5Prior to 1 April 2002, the registration by the relevant local authorities of residential care homes for adults was governed by the Registered Homes Act 1984 and that of children's homes by the Children Act 1989. Since 1 April 2002, the registration by the National Care Standards Commission of persons or bodies operating such homes is provided for by the Care Standards Act 2000.

6The Care Standards Act 2000 defines a 'children's home' as an establishment which provides care and accommodation wholly or mainly for children. It defines a 'care home' as an establishment which provides accommodation together with nursing or personal care for persons who are or have been ill, have or have had a mental disorder, are disabled or infirm, or are or have been dependent on alcohol or drugs.

7Under the Care Standards Act 2000, persons or bodies who operate children's homes or care homes must be registered with the National Care Standards Commission. That Commission may grant an application for registration only if it is satisfied that the requirements of the legislation will be complied with. Registration may subsequently be cancelled if, in particular, the applicant is convicted of an offence under the Care Standards Act 2000, the Registered Homes Act 1984 or the Children Act 1989, or if the establishment has not been run in accordance with the requirements of the Care Standards Act 2000 or any other relevant legislation.

8The National Care Standards Commission may at any time require information regarding an establishment or enter and inspect it, examine or remove records and conduct private interviews with staff, and — subject to their consent — with the residents.

9The Care Standards Act 2000 confers on the national authorities a power to adopt regulations imposing any appropriate further requirements or to publish statements of national minimum standards for those establishments.

VAT legislation

10Under the Value Added Tax Act 1994 ('the VAT Act') supplies of welfare services are eligible for exemption from VAT.

11Prior to 21 March 2002, item 9 of Group 7 in Schedule 9 to the VAT Act exempted only supplies, otherwise than for profit, by a charity or public body, of welfare services and of goods supplied in connection with those services.

12Under domestic law, a 'charity' must be set up for exclusively charitable purposes and therefore cannot be run for profit.

13Item 9 of Group 7 in Schedule 9 to the VAT Act, as amended by the Value Added Tax (Health and Welfare) Order 2002 (SI 2002/762), 'the amended VAT Act'), exempts 'the supply by

(a) a charity,

(b) a state-regulated private welfare institution or agency, or

(c) a public body,

of welfare services and of goods supplied in connection with those welfare services'.

14According to note 6 to Group 7 in Schedule 9 to the amended VAT Act, the welfare services covered by the exemption are services which are directly connected with the provision of care, treatment or instruction designed to promote the physical or mental welfare of elderly, sick, distressed or disabled persons and the care or protection of children and young persons.

The main proceedings and the questions referred for a preliminary ruling

15The appellants in the main proceedings formed the partnership Kingscrest for the purpose of operating residential care homes in the United Kingdom. Kingscrest is run for profit and is therefore not a 'charity' within the meaning of the national legislation. It operates four homes, all of which were formerly registered by the relevant local authorities under the Registered Homes Act 1984 or the Children Act 1989 and are now registered under the Care Standards Act 2000.

16According to the order for reference, it is common ground that Kingscrest's supplies are of 'welfare services' within the meaning of item 9 of Group 7 in Schedule 9 to the amended VAT Act and that the partnership is a 'state-regulated private welfare institution' within the meaning of that provision.

17Until 21 March 2002, the supplies made by Kingscrest were subject to VAT. Since that date, they are exempt, by decision of the Commissioners, on the ground that, in accordance with item 9, the partnership ceased to make taxable supplies from that date.

18The appellants in the main proceedings appealed against that decision on the ground that item 9 of Group 7 in Schedule 9 to the amended VAT Act is incompatible with Article 13A(1)(g) and (h) of the Sixth Directive. They claim that in introducing the concept of 'state-regulated private welfare institution', the national legislation has gone beyond what is permissible under the Sixth Directive.

19The Commissioners replied that the expression 'charitable' used in Article 13A(1)(g) and (h) of the Sixth Directive refers to a Community law concept which does not have the same meaning as that of 'charitable' in domestic law. Organisations recognised as charitable by the Member State concerned', within the meaning of that provision, can include organisations registered under the Registered Homes Act 1984, the Children Act 1989 or the Care Standards Act 2000.

20In those circumstances, the VAT and Duties Tribunal, London, decided to stay the proceedings and refer the following questions to the Court of Justice for a preliminary ruling:

'(1) Is it permissible to resort to other language versions of the Sixth ... Directive ... to elucidate the meaning of the word "charitable" in Article 13A(1)(g) and (h), or must the word have the same meaning as in domestic law?

(2) If Article 13A(1)(g) and (h) are to be interpreted as applying to an organisation that is recognised as having a social character, are they to be interpreted as applying to a profit-making entity such as the Kingscrest Residential Care Homes partnership?

(3) Are Article 13A(1)(g) and (h) of the Directive to be interpreted as meaning that they confer on Member States a discretion to recognise for the purposes of those provisions an organisation which is registered under the Care Standards Act 2000 (or the Registered Homes Act 1984 or the Children Act 1989) but which is not a body governed by public law and does not have the status of a charity under the domestic law of the Member State concerned?'

On the questions referred

The first question

21By its first question, the national court asks, in essence, whether the word 'charitable', used in the English version of Article 13A(1)(g) and (h) of the Sixth Directive, must be given a definition distinct from that given it by domestic law and, if so, whether the word's interpretation must take account of all the language versions of the Sixth Directive.

22In that regard, it should be observed that according to settled case-law the exemptions provided for in Article 13 of the Sixth Directive have their own independent meaning in Community law and they must therefore be given a Community definition (see Case C-358/97 Commission v Ireland [2000] ECR I-6301, paragraph 51; Case C-275/01 SinclairCollis [2003] ECR I-5965, paragraph 22; and Case C-284/03 Temco Europe [2004] ECR I-11232, paragraph 16).

23That must also be true of the specific conditions laid down for those exemptions to apply and in particular of those concerning the status or identity of the economic agent performing the services covered by the exemption (Case C-453/93 Bulthuis-Griffioen [1995] ECR I-2341, paragraph 18).

24As the Court has already held, although the introductory sentence of Article 13A(1) of the Sixth Directive states that Member States are to lay down the conditions for exemptions in order to ensure the correct and straightforward application of the exemptions and to prevent any possible evasion, avoidance or abuse, those conditions cannot affect the definition of the subject-matter of the exemptions envisaged (Case C-287/00 Commission v Germany [2002] ECR I-5811, paragraph 50).

25From that point of view, whether a specific transaction is subject to or exempt from VAT cannot depend on its classification in national law (see Case C-76/99 Commission v France [2001] ECR I-249, paragraph 26, and Case C-315/00 Maierhofer [2003] ECR I-563, paragraph 26).

26In addition, it follows from settled case-law that the need for a uniform interpretation of Community directives makes it impossible for the text of a provision to be considered, in case of doubt, in isolation; on the contrary, it requires that it be interpreted and applied in the light of the versions existing in the other official languages (Case C-296/95 EMU Tabac and Others [1998] ECR I-1605, paragraph 36, and Case C-321/96 Mecklenburg [1998] ECR I-3809, paragraph 29).

27In those circumstances, the reply to the first question must be that the word 'charitable' in the English version of Article 13A(l)(g) and (h) of the Sixth Directive has its own independent meaning in Community law which must be interpreted taking account of all the language versions of that directive.

The second question

28By its second question, the national court asks, in essence, whether the expression Organisations recognised as charitable by the Member State concerned' in Article 13A(1)(g) and (h) of the Sixth Directive can apply to private profit-making entities.

29According to the Court's case-law, the exemptions envisaged in Article 13 of the Sixth Directive are to be interpreted strictly since they constitute exceptions to the general principle that VAT is to be levied on all supplies of services for consideration by a taxable person (see, in particular, Commission v Germany, cited above, paragraph 43; Case C-8/01 Taksatorringen [2003] ECR I-13711, paragraph 36; and Temco Europe, cited above, paragraph 17). However, the interpretation of the terms used in that provision must be consistent with the objectives pursued by those exemptions and comply with the requirements of the principle of fiscal neutrality inherent in the common system of VAT (Case C-45/01 Dornier [2003] ECR I-12911, paragraph 42).

30In that regard, so far as concerns, first, the objectives pursued by the exemptions under Article 13A(1)(g) and (h) of the Sixth Directive, it is clear from that provision that those exemptions, by treating certain supplies of services in the general interest in the social sector more favourably for the purposes of VAT, are intended to reduce the cost of those services and to make them more accessible to the individuals who may benefit from them.

31In the light of that objective, it must be observed, first, that the commercial nature of an activity does not preclude it from being, in the context of Article 13A of the Sixth Directive, an activity in the general interest (Case C-144/00 Hoffmann [2003] ECR 1-2921, paragraph 38).

32Secondly, the expression Organisations recognised as charitable' in Article 13A(l)(g) and (h) of the Sixth Directive does not call for a particularly narrow construction (see, to that effect, Dornier, cited above, paragraph 48).

33It should be noted that, save perhaps the Danish and Swedish versions of the provision, which refer, in essence, to the pursuit of the general interest, none of the other language versions thereof limit entitlement to the exemptions thereunder to non-profit-making entities.

34According to a literal interpretation of the wording of those other versions of Article 13A(l)(g) and (h) of the Sixth Directive, to be eligible for the exemption it is sufficient if two requirements are satisfied: first, that the supplies are connected either to welfare or social security work or to the protection of children or young persons, and secondly that such supplies are made by bodies governed by public law or other organisations recognised by the Member State concerned as essentially charitable.

35The term 'organisation' is in principle sufficiently broad to include private profitmaking entities (see, to that effect, Case C-216/97 Gregg [1999] ECR I-4947, paragraph 17, and Hoffmann, cited above, paragraph 24).

36Thus the Court has already held, in respect of a private entity aiming to make a profit, that the expression 'other organisations recognised as charitable by the Member State concerned' in Article 13A(l)(g) of the Sixth Directive does not exclude from that exemption natural persons running a 'business' (see Gregg, cited above, paragraph 21).

37Furthermore, as the Commission of the European Communities and the United Kingdom correctly argued, when the Community legislature intended to restrict the grant of the exemptions under Article 13A(1) of the Sixth Directive to certain non-profit-making or non-commercial entities, it said so expressly, as is clear from subparagraphs (1), (m) and (q) thereof.

38Finally, it must be noted that the first indent of Article 13A(2)(a) of the Sixth Directive, which is an optional condition which Member States may also impose for the grant of certain exemptions mentioned in Article 13A(1) of that directive (see, to that effect, Case C-267/00 ZoologicalSociety [2002] ECR I-3353, paragraph 16), authorises, but does not oblige, the Member States to restrict entitlement to the exemptions under, inter alia, Article 13A(1)(g) and (h) to bodies other than public-law bodies which do not systematically seek to make profit (Hoffmann, cited above, paragraph 38).

39As the Court has already held, the condition set out in the first indent of Article 13A (2) (a) of the Sixth Directive concerning the absence of systematic profit-seeking essentially replicates the criterion of non-profit-making organisation as contained, particularly, in Article 13A(1)(m) thereof (Case C-174/00 Kennemer Golf [2002] ECR I-3293, paragraph 33).

40In those circumstances, in order not to deprive the first indent of Article 13A(2)(a) of the Sixth Directive of all purpose, it must necessarily be accepted that, where the Community legislature, as in Article 13A(1)(g) and (h), has not expressly made entitlement to the exemptions in question subject to the absence of a profit-making aim, the pursuit of such an aim cannot preclude entitlement to those exemptions (see, to that effect, Kennemer Golf, paragraph 34, and Hoffmann, paragraph 38).

41As regards, secondly, the principle of fiscal neutrality, it must be remembered that that principle precludes, in particular, treating similar supplies of services, which are thus in competition with each other, differently for VAT purposes (see, to that effect, Case C-141/00 Kügler [2002] ECR I-6833, paragraph 30, and Case C-109/02 Commission v Germany [2003] ECR I-12691, paragraph 20).

42Clearly, as the Advocate General observed, in essence, in paragraph 29 of his Opinion, that principle would not be observed if, where the national legislature has not made the exemption subject to the condition set out in the first indent of Article 13A(2)(a) of the Sixth Directive, the welfare services covered in Article 13A(1)(g) and (h) were treated differently for VAT purposes depending on whether the entities which provide them are profit-making or not.

KINGSCREST ASSOCIATES AND MON'TECELLO

43It follows from all those considerations that the pursuit of such an aim does not preclude entitlement to the exemptions provided for under Article 13A(l)(g) and (h) of the Sixth Directive.

44That conclusion is not undermined by the fact that the appellants in the main proceedings, in view of the fact that they pursue a profit-making aim, do not have charitable status under domestic law, in spite of the fact that the English version of Article 13A(1)(g) and (h) of the Sixth Directive reserves the exemptions thereunder for organisations recognised as 'charitable'. As is clear from the reply to the first question, the concepts mentioned in the Sixth Directive are independent concepts of Community law and not concepts of domestic law.

45As a result, since the appellants in the main proceedings have the status of an organisation recognised as charitable within the meaning of Article 13A(l)(g) and (h) of the Sixth Directive, they are eligible for the exemptions under that provision, notwithstanding the fact that they pursue a profit-making aim and that, therefore, they do not have charitable status under domestic law.

46In that regard, it must be pointed out that, at the hearing, the appellants in the main proceedings themselves accepted that the pursuit of a profit-making aim, whilst it may be a relevant criterion to be taken into account in determining whether an organisation is charitable within the meaning of that provision, by no means precludes it altogether from being charitable.

47The answer to the second question must therefore be that the meaning of Organisations recognised as charitable by the Member State concerned' in Article 13A(l)(g) and (h) of the Sixth Directive does not exclude private profit-making entities.

The third question

48By its third question, the national court asks, in essence, whether the Member States have a discretion to recognise a private profit-making entity which does not have charitable status under domestic law as 'charitable' within the meaning of Article 13A(l)(g) and (h) of the Sixth Directive.

49In that regard, it must be stated at the outset that Article 13A(l)(g) and (h) of the Sixth Directive do not specify the conditions and procedures for recognising organisations other than those governed by public law as charitable. It is thus in principle for the national law of each Member State to lay down the rules according to which such recognition may be granted to such organisations (see, to that effect, Dormer, cited above, paragraph 64).

so The adoption of national rules in this area is, moreover, provided for in Article 13A (2) (a) of the Sixth Directive, under which 'the Member States may make the granting to bodies other than those governed by public law of each exemption provided for in (1) ... (g), (h), ... subject in each individual case to one ... of the conditions' referred to later therein (see, to that effect, Dornier, cited above, paragraph 65).

51It follows therefore that Article 13A(1)(g) and (h) of the Sixth Directive grant the Member States, as the Court has already held as regards the first of those provisions (see Kügler, cited above, paragraph 54), a discretion to recognise as charitable certain organisations not governed by public law.

52However, it is also clear from the case-law that where a taxable person challenges the recognition of an organisation as charitable it is for the national courts to examine whether the competent authorities have observed the limits of the discretion granted by Article 13A(1)(g) and (h) of the Sixth Directive in applying Community principles, in particular the principle of equal treatment (see, to that effect, Kügler, paragraph 56, and Dornier, paragraph 69).

53In that regard, it follows from the case-law that it is for the national authorities, in accordance with Community law and subject to review by the national courts, to take into account, in particular, the existence of specific provisions, be they national or regional, legislative or administrative, or tax or social security provisions, the general interest of the activities of the taxable person concerned, the fact that other taxable persons carrying on the same activities already have similar recognition, and the fact that the costs of the supplies in question may be largely met by health insurance schemes or other social security bodies (see Kügler, paragraphs 57 and 58, and Dornier, paragraph 72).

54In addition, it must be recalled that the principle of fiscal neutrality precludes, in particular, treating similar supplies of services, which are thus in competition with each other, differently for VAT purposes (see, to that effect, Kügler, paragraph 30, and Commission v Germany, paragraph 20).

55In the main proceedings, it is therefore for the national court to determine, having regard to all those matters, whether the recognition of Kingscrest as a charitable organisation for the purposes of the exemptions provided for in Article 13A(1)(g) and (h) of the Sixth Directive entails infringement of the principle of equal treatment in relation to other operators making the same supplies in comparable situations.

56In that regard, it must be observed that it follows from the reply to the second question that the condition whereby private profit-making entities may be recognised as charitable does not exceed the limits of the discretion granted to the Member States by Article 13A(1)(g) and (h) of the Sixth Directive.

57For the purposes of determining whether the limits of the discretion have been exceeded in this case, the national court may, on the other hand, take into account in particular the fact that, under the amended VAT Act, entitlement to the exemptions provided for in Article 13A(1)(g) and (h) of the Sixth Directive extends to all organisations registered under the Care Standards Act 2000, as well as the fact that that Act and the amended VAT Act contain specific provisions which not only reserve entitlement to those exemptions to organisations supplying welfare services, the content of which is defined by those Acts, but also govern the conditions for providing those supplies, by making the organisations which provide them subject to restrictions and checks by the national authorities, in terms of registration, inspection and rules concerning both buildings and equipment and the qualifications of the persons authorised to manage them.

58The reply to the third question must therefore be that it is for the national court to determine, having regard, in particular, to the principles of equal treatment and fiscal neutrality, and taking account of the nature of the supplies of services in question, as well as the conditions for making them, whether the recognition of a private profit-making entity, which as such does not have charitable status under domestic law, as charitable for the purposes of the exemptions provided for in Article 13A(1)(g) and (h) of the Sixth Directive exceeds the discretion granted by those provisions to the Member States for the purposes of such recognition.

Costs

Costs

59Since these proceedings are, for the parties to the main proceedings, a step in the appeal pending before the national tribunal, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (Third Chamber) hereby rules:

1. The word 'charitable' in the English version of Article 13A(1)(g) and (h) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment is a concept with its own independent meaning in Community law which must be interpreted taking account of all the language versions of that directive.

2. The meaning of 'organisations recognised as charitable by the Member State concerned' in Article 13A(1)(g) and (h) of the Sixth Directive 77/388 does not exclude private profit-making entities.

3. It is for the national court to determine, having regard, in particular, to the principles of equal treatment and fiscal neutrality, and taking account of the content of the supplies of services in question, as well as the conditions for making them, whether the recognition of a private profit-making entity, which as such does not have charitable status under domestic law, as charitable for the purposes of the exemptions under Article 13A(1)(g) and (h) of the Sixth Directive 77/388 exceeds the discretion granted by those provisions to the Member States for the purposes of such recognition.

[Signatures]

OPINION OF ADVOCATE GENERAL RUIZ-JARABO COLOMER 1 delivered on 22 February 2005

Introduction

1In these proceedings, the Court of Justice is asked to consider the concept of 'charitable organisations' which is used in Article 13A(l)(g) and (h) of the Sixth Value Added 2 Tax Directive to define the scope of the exemptions for supplies of goods and services directly related to welfare and social security and the protection of children and 3 young people.

2The VAT and Duties Tribunal is hearing a case in which an issue is whether the operation of residential care homes by a partnership is subject to tax. It has referred three questions to the Court, of which only the second merits consideration in the oral procedure, as it would have been possible to

1 — Original language: Spanish.

2 — Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member Status relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1).

3 — In this Opinion, I shall use expressions such as 'welfare','social security' and similar terms to cover the legal acts described in the abovementioned provisions.

answer the first and the third by the more expeditious procedure under Article 104(3) of the Rules of Procedure, since the answers are clearly inferable from the case-law.

I — The Community provisions to be interpreted

3Title X of the Sixth Directive governs exemptions. Article 13 contemplates, among those relating to operations within a given country, those which are available for certain activities in the public interest (part A, paragraph 1), including:

'...

(g) the supply of services and of goods closely linked to welfare and social KINGSCREST ASSOCIATES AND MON'TECELLO security work, including those supplied by old people's homes, by bodies governed by public law or by other organisations recognised as charitable by the Member State concerned;

(h) the supply of services and of goods closely linked to the protection of children and young persons by bodies governed by public law or by other organisations recognised as charitable by the Member State concerned;

4Under Article 13A(2)(a), it is possible, in the case of entities governed by private law, for the grant of an exemption to be made subject to one or more of the following conditions:

— — they shall not systematically aim to make a profit, but any profits nevertheless arising shall not be distributed, but shall be assigned to the continuance or improvement of the services supplied;

-1 — Footnote not relevant to English version.

— they shall be managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the results of the activities concerned;

— they shall charge prices approved by the public authorities or which do not exceed such approved prices or, in respect of those services not subject to approval, prices lower than those charged for similar services by commercial enterprises subject to value added tax;

— exemption of the services concerned shall not be likely to create distortions of competition such as to place at a disadvantage commercial enterprises liable to value added tax.'

II — The facts of the main proceedings and the relevant national law

5On 22 April 1997, the companies Kingscrest Associates Limited and Montecello Limited set up, under the name 'Kingscrest Residential Care Homes' ('Kingscrest'), a partnership to operate on a profit-making basis four care homes for the elderly and two for children, registered under the Registered Homes Act 1984 and the Children Act 1989. As from 1 April 2002, the date of entry into force of the Care Standards Act 2000, the six homes were registered with the competent authority, the National Care Standards Commission.

6The Charities Act 1993 is concerned with charities, defining them in section 96 as institutions, corporate or not, established for charitable purposes and subject to the control of the High Court. According to section 97, those purposes are to be determined 'according to the law of England and 5 Wales'.

7Before 21 March 2002, item 9 of Group 7 in Schedule 9 to the Value Added Tax Act 1994 exempted not-for-profit welfare services provided by a company in the category mentioned above or by a public body, so that, at the material time, Kingscrest's activity was subject to tax since it always sought to earn a profit.

8However, from that date, the Value Added Tax (Health and Welfare) Order 2002 (SI 2002/762) substituted new wording for item 9, so that grant of the exemption is no longer conditional upon the supply being otherwise than for profit, even when it is provided by a 'State-regulated' private establishment.

9As far as the present case is concerned, Note 6 concerning Group 7 describes 'welfare services' as those directly connected with 'the provision of care, treatment or instruction designed to promote the physical or mental welfare of elderly, sick, distressed or disabled persons' and the 'care or protection of children or young persons'. If they are provided by a private 'State-regulated' institution, only the services for which it was established are taken into consideration.

10Note 8 defines 'State-regulated' as meaning 'approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to a provision of 6 5 — In the order for reference (paragraph 17), it is stated that, in an a public general Act.' 1891 decision (Income Tax Commissioners v Pemsel [1891] AC 531), the House of Lords stated that the legal meaning of the word 'charitable' is not the same as Üte meaning of the word in everyday language and that the main charitable purposes in law are the relief of poverty, the advancement of education, the advancement of religion and certain other purposes beneficial to the community.

6 — It excludes provisions coming into force on different dates in relation to different local authority areas.

11It is undisputed that Kingscrest falls into that category, providing welfare services which are exempt from VAT as from 21 March 2002, for which reason the Commissioners of Customs and Excise cancelled its registration for VAT purposes with effect from that date.

III — The questions referred to the Court of Justice

12Kingscrest challenged that decision before the VAT and Duties Tribunal, claiming that the decision to grant it an exemption infringed Article 13A(l)(g) and (h) of the Sixth Directive. To enable it to give judgment, that Tribunal has referred the following questions to the Court for a preliminary ruling:

'1 Is it permissible to resort to other language versions of the Sixth Council Directive 77/388/EEC to elucidate the meaning of the word "charitable" in Article 13A(l)(g) and (h), or must the word have the same meaning as in domestic law?

2 If Article 13A(l)(g) and (h) are to be interpreted as applying to an organisation that is recognised as having a social character, are they to be interpreted as applying to a profit-making entity such as the Kingscrest Residential Care Homes partnership?

3 Are Article 13A(l)(g) and (h) of the Directive to be interpreted as meaning that they confer on Member States a discretion to recognise for the purposes of those provisions an organisation which is registered under the Care Standards Act 2000 (or the Registered Homes Act 1984 or the Children Act 1989) but which is not a body governed by public law and does not have the status of a "charity" under the domestic law of the Member State concerned?'

IV — Proceedings before the Court of Justice

13Written observations were submitted within the time-limit laid down in Article 20 of the EC Statute of the Court of Justice by the United Kingdom Government, Kingscrest and the Commission, whose representatives attended the hearing on 27 January 2005 to present oral argument.

V — Examination of the questions submitted

the tax should be of general application and 8 upset its neutrality, and they consider that it would be more appropriate to the nature of the tax to set lower rates or even minimum rates of tax, an approach that would have similar ramifications for the revenue ulti A — Preliminary considerations: the 'original 7 sin' of Community VAT

14It might appear surprising that an undertaking whose activity is exempted from tax should take exception to that situation and seek to be made subject to it, but the exemption affects it adversely in that, having been relegated to the status of final consumer, it cannot deduct the tax paid on purchases of the goods and services it needs to carry on its business.

15That situation has perverse tax repercussions because the taxable person to whom the exemption applies will attempt to incorporate the negative impact thereof in the prices charged, so that objective exemptions, designed to promote certain kinds of activity or encourage the development of certain industrial sectors, bring about a result that is opposite to the one pursued, since the 'tax benefit' makes economic activities more expensive.

16Not without reason, certain authors take the view that exemptions within the common system of VAT breach the principle that

7 — I have borrowed this expression from I. Ibáñez García, 'Las exenciones en el IVA. Pecado original del impuesto comunitario', published in Noticias de la Unión Europea, 2003, No 226, pp. 103 to 115.

mately collected but would not distort the 9 functioning of the system.

B — The criteria for interpretation. In particular, the 'linguistic criterion' (Question 1)

17The United Kingdom court commences its dialogue with the Court of Justice with a question that expresses two doubts, both now clarified by the case-law. The first issue is whether the expression 'charitable' used in Article 13A(l)(g) and (h) of the Sixth Directive must be construed in the light of domestic law or in accordance with the specific needs of the Community legal order: if the answer is to the latter effect, the second doubt concerns the possibility of relying, for the purpose of interpretation, on other language versions of the provision.

8 — See L.M. Pérez Herrero, La Sexta Directiva Comunitaria del IVA, Editorial Cedecs, Barcelona 1997, p. 201.1. Ibáñez García explains, on the basis of an example, in his work cited above (at pp. 103 and 104), that the principle of neutrality has not been supported by the pro rata rule provided for in Articles 17 (5) and 19 of the Sixth Directive, even thought the Community case-law has expressed the opposite view: the judgment in Case C-306/94 Régie Dauphinoise [1995] ECR I-3695 states that the aim pursued by those provisions is 'to comply with the objective of complete neutrality guaranteed by the common system of VAT'.

9 — As stated by I. Ibáñez García, op. cit., p. 105.

18To arrive at a solution, it is useful, as I pointed out in my Opinions of 12 July 2001 and 25 March 2004 in the CSC Financial Services and Cimber Air cases, to set out the guidelines adopted for interpreting the provisions exempting certain transactions from VAT.

19I made it clear then that, since taxation is the general rule, as set out in Article 2(1) of the Sixth Directive, exemptions constitute exceptions and must, like every release from the obligation to pay tax, be strictly interpreted, as has been recognised in the case-law, 11 but that requirement does not mean that the terms used to specify exemptions should deprive them of their intended 12 effect.

20I also drew attention to the great importance of the principle of neutrality in the common system of VAT, which the system of exemptions undermines, in so fai

10 - Case C-235/00 CSC Financial Services [2001] ECR I-10237 and Case C-382/02 Cimber Air [2004] ECR I-8379.

11 —Case C-185/89 Velker International Oil Company [1990] ECR I-2561. paragraph 19; Case C-2/9S SDC [1997] ECR I 3017, paragraph 20; Case C-359/97 Commission v United Kingdom [20001 ECR I-6355. paragraph 64, and Case C-240/99 Skandia [2001| ECR I-1951, paragraph 32. There are also three judgments of 20 November 2003 in Case C-8/01 Taksatorrmgen, Case C-212/01 Margarete Unterpertinger and Case C-307/01 Peter d'Ambrumeml, paragraphs 36. 34 and 52 respectively, none of which has yet been published in the European Court Reports. Recently, the Court of Justice reiterated the principle of strict interpretation for exemptions in its judgment in Case C-284/03 Temco Europe [2004] ECR I-11237, paragraph 17.

12 — As 1 stated in point 37 of my Opinion in Temco Europe; that approach is followed in the judgment. in paragraph 17. as it disregards the general applicability of the tax as an instrument that is conducive to competition in a single market, so that, in order to ensure that the arrangements for the tax are coherent and consistent in all the Member States, there must be a consensus that Title X of the Sixth Directive uses autonomous Community law concepts.

21For the present purposes, Article 13 of the Sixth Directive sets out, as mentioned in the 11th recital in its preamble, a common list of exemptions to ensure that Community own resources are collected uniformly in all the Member States, from which it is to be inferred that those tax measures are independent concepts and must be defined from the viewpoint of the legal order of the European Union according to its structural needs, as recently repeated in the abovementioned judgment in Temco Europe (para 13 graph 16).

22Consequently, the wording of Article 13 can only be construed by reference to particular categories within the domestic law of each Member State in cases where, by that means, a definition is arrived at which ensures that those words have the same scope in every corner of the Cominil

13 — In that lodgment, reference is made to Case C-358/97 Commission v Ireland [2000] ECR I-6301, paragraph 51; Case C-315/00 Maierhofer [2003] ECR I-563, paragraph 25; and Case C-275/01 Sinclair Collis [2003| ECR I-5965. paragraph 22. See. to the same effect. Case C-359,97 Commission v United Kingdom [2000] ECR I-6355. paragraph 63; Case C-326/99 Coed Wonen' [2001] ECR I-6831, paragraph 47; and Case C-269/00 Seeling [2003] ECR I-4101. paragraph 46. nity, but, if that is not the case, it is necessary to go to a different source, which is independent from the State systems, in order to safeguard the effectiveness of Community law. In that process, the 'linguistic criterion' is an extremely useful tool because, when the essence of the concept and the reasons for its recognition are examined, with due regard to the principle of fiscal neutrality that is inherent in the common system of VAT, it is essential to have recourse to the various 14 language versions in order to decipher the meaning of the words of the Sixth Directive.

23I would therefore suggest that the Court of Justice reply to the first question by saying that, in order to clarify the meaning of the word 'charitable' contained in subparagraphs (g) and (h) of Article 13A(1) of the Sixth Directive, reference may be made to the versions of those provisions in other official languages of the Community in order to achieve a harmonious interpretation, and the term should not have attributed to it a meaning deriving from domestic law where that would lead to disparate interpretations.

24The last point makes it necessary to go further than is suggested by the terms of the question since, if the aim pursued is to

14 — Linguistic plurality and the associated problems became apparent in literature at an early stage since, as early as 1605, ensure a uniform interpretation of Community law, that task is a matter of the Court of Justice, which will inform the national court, after a comprehensive examination of the various translations, that, when the provision refers to organisations recognised as charitable, it is referring, as the Commission states in its written observations, to entities which provide welfare services.

25This approach is required not only because most versions of the Directive use expressions close to the Spanish term 16 'caracter social' (in English, 'social nature'), but also because it is more conducive to the aims of the Directive. From an analysis of Article 13A(1) it is possible to discern the intention to exempt operations which, because of their close link with the objectives properly pursued by a social and democratic 17 State governed by the rule of law, are classified as being in the public interest and relate to activities which the public authorities have traditionally promoted and managed directly or through intermediaries (postal, radio and television services, health, education, social security, protection of children and young people, the exercise of religious freedom, physical education and sports, and the promotion of culture). Against that background, it seems beyond

15 — I refer to the official languages of the Communities as at the date of the order for reference (26 November 2003).

16 — The text in French ('caractère social'), Portuguese ('carácter social'), Italian ('carattere sociale'), German ('sozialem Char akter'), Dutch ('sociale aard'), Greek ('κοινωνικού χαρακτήρος') and Finnish ('luonteeltaan yhteiskunnallisiksi') contain expressions similar to the Spanish term 'carácter social'. However, the Swedish ('välgörenhetsorganisationer') Miguel de Cervantes, in El ingenioso hidalgo Don Quijote de la Mancha, wrote 'that day happened to be a Thursday and in the inn there was nothing but a few portions of fish which in Castile they call abadejo, in Andalusia bacallao, in some other places curadillo, and in yet other places truchuela'. and the Danish ('almennyttig karakter') use terms which are closer to the English words.

17 — Academic writers speak of benefits from 'the Welfare State' (see L.M. Pérez Herrero, op. cit., p. 204).

dispute that the English expression 'charitable' refers not to ideas of charity or benevolence, which are reminiscent of private altruistic actions for the benefit of 18 people in need, but rather to a broader idea, of public scope, which may encompass unselfish activities but includes all policies of support for the most disadvantaged groups.

26The foregoing considerations pave the way to the other questions raised by the United Kingdom court.

C — 'Social character' as opposed to pursuit of profit (Question 2)

27The second question seeks to clarify whether, in the context of Article 13A(l)(g) and(h) of the Sixth Directive, a private profitmaking entity should be classified as being of a 'social' nature.

18 — Charles Dickens, in The Life and Adventures of Martin Chuzzlcwit. Penguin Books. 1968, p. 515. puts in the mouth of his character Tigg, who is experiencing financial difficulties, the words: 'chanty begins at home, and itistice begins next door'.

28Two arguments militate in favour of a positive answer: the first is teleologicai and the other is systematic.

29It should not be forgotten that exemptions are, as I pointed out in my Opinion in CSC Financial Services, cited above (point 18), tax benefits, in the form of economic incentives with a negative tinge. Article 13A (1) of the Sixth Directive relies on objective criteria, discharging from the tax certain events which would otherwise be subject to it, with a view to providing incentives in the sectors in question. The exemption attaches, therefore, to legal acts, not to those who carry them out, although the latter ultimately 19 benefit from them. Accordingly, when the aim is pursued of promoting and encoura

19 — Kmgscrest endeavours to demonstrate its profit motive so as not to be affected by the exemption provision, but it errs considerably in doing so since the exemption is not subiective, t he Įudgment in Case C-174/00 Kamenier Golf [2002] ECR I-3293 appears to classify it thus, in conceding that the aim of the exemption in subparagraphs (h) to (p) of Article 13A(1) of the Sixth Directive consists in granting preferential treatment to certain bodies whose activities are directed towards non-commercial purposes (paragraph 19); but, when examined closely, that statement, which was obiter dictum, merely is in line with the opposite view, since the ultimate cause of the exemption lies in the nature of the tasks carried out. For J.F, Pont Clemente, in La exención tributaria (análisis juridico general con especial aplicación al Impuesto sobre transmisiones patrimoniales y al IVA, Editorial EDEIRSA, 1986, pp. 26 and 2?). when the law distinguishes certain acts and — despite the fact that they are subiect to tax. because the law so provides — grants an exemption for them, that can be regarded only as an obiective exemption. On the contrary, if the legislature exempts from tax a person or category- of person — who, if that exclusionary provision were not there, would have to fulfil the obligation — it creates a subiective exemption. The first category- precludes the emergence of a legal tax relationship, whereas the latter merely relieves the exempted person of an obligation, a fact which does not prevent the obligation from attaching two others.

ging welfare work on the part of public authorities and bodies of a 'social character', it is irrelevant whether the latter operate in pursuit of profit or otherwise. The opposite solution might breach the common system of VAT and undermine the principle of neutrality, since it would leave the door open to different treatment for activities of the same kind, depending on the legal regime applicable in each Member State.

30The structural explanation put forward by the Commission supports the foregoing reasoning, on the basis of two arguments. According to the first, when Article 13A(1) of the Sixth Directive excludes from the exemption operations by profit-making bodies, it does so expressly, as in subpara 20 graphs (1) and (m). The second is based on the fact that, otherwise, Article 13A(2)(a) would be meaningless since authorising Member States to make eligibility for exemptions under subparagraphs (g) and (h) of paragraph 1 for private companies subject to the condition that they do not systematically seek to make a profit involves admitting that the first provision includes situations in which profit is sought.

20 — Subparagraph (1) refers to 'non-profit-making organisations with aims of a political, trade-union, religious, patriotic, philosophical, philanthropic or civic nature', whereas subparagraph (m) refers to services 'supplied by non-profitmaking organisations to persons taking part in sport or physical education'.

31The solution which I propose has been implicitly incorporated in the case-law. After 21 the judgment in Bulthuis-Griffioen did not make any pronouncement on the matter and removed the exemption for operations by natural persons, emphasising that, against that background, it would be irrelevant to rule as to the existence of a profit motive, the 22 judgment in Gregg corrected that initial tendency, accepting that paragraph (g) includes individuals who operate a business, so that the exemption would extend to welfare activities undertaken by profit-mak ing organisations, because the fact of 'running a business' involves the wish to be 23 2 profitable. Also, in Hoffmann * it was stated that, in the context of Article 13A of the Sixth Directive, the commercial nature of a business does not prevent it from being in the public interest (end of paragraph 38) because the aim is to promote activities which are conducive to the good of society as a whole, regardless of the economic and legal regime governing the supply.

32In short, the fact that persons operating in the areas covered by Article 13A(1)(g) and (h) of the Sixth Directive seek a profit does not constitute an obstacle to their being regarded as Organisations of a social char-

21 - Case C-453/93 Bulthuis-Griffioen [1995] ECR I-2341. 22 — Case C-216/97 Gregg [1999] ECR I-4947.

23 — The reasoning developed by Advocate General Cosmas in point 24 et seq. of his Opinion in Gregg is interesting. 24 — Case C-144/00 Hoffmann [2003] ECR 1-2921.

acter' and, accordingly, there is nothing in principle to prevent a company like Kingscrest from being classified as such.

D — The Member States' discretion as to whether to recognise a private entity as being of a 'social character' (Question 3)

33By its last question, the referring court wishes to ascertain whether the national authorities enjoy a degree of latitude regarding the attribution of that status to organisations not governed by public law. The Community case-law has ruled in the affirmative in two fairly recent judgments: 25 the first in Kügler and the second in 2 Dornier. 6 A reference to those judgments will be sufficient to dispose of this question, but the question was framed in such a way, albeit merely by implication, as to disclose a doubt as to whether registration under the Care Standards Act 2000 (previously, the Registered Homes Act 1984 and the Children Act 1989) constitutes a proper exercise of that discretion. Some clarification is called for.

25 - Case C-141/00 Kugler [2002] ECR I-6833, paragraph 54. 26 - Case- C 45 01 Dornier [2002] ECR I-12911, paragraph 69.

34Those judgments do not grant the Member States total freedom to exercise that discretion, it being subject to Community principles, in particular that of equal treatment (Kügler, paragraph 56), and they identify certain elements such as the public interest in the activity undertaken by the taxable person, the fact that other taxpayers who supply the same services enjoy similar recognition and the fact that sickness insurance bodies and other social security institutions may defray to a considerable extent the cost of the services involved (paragraph 58 and 72 of Kügler and Dornier respectively).

35It is therefore necessary to examine the meaning of this concept and put forward reliable guidelines to be used for identifying with the greatest possible accuracy the degree of latitude that is available, giving the referring court a clear framework within which to give judgment concerning the national provision, which is a matter reserved to its jurisdiction alone.

36In the first place, it should be borne in mind that, in the domain of VAT, and more specifically in that of objective exemptions, the tax authorities must not exercise their discretionary powers in such a way as to destroy the neutrality of the tax and contravene the inherent requirement of equal treatment, and must not overlook the exceptional nature of those exemptions. There are therefore two limitations, which are 'matters of principle', as expounded by the Court of Justice: one relates to the nature of the activity, conducive to the public interest, and one requires equal VAT treatment for economic agents in comparable 27 situations, from which it may be inferred that the classification criteria must be neutral, abstract and predetermined.

37The same conclusion follows from an examination of the structure of Article 13A of the Sixth Directive, since paragraph 1 obliges the Member States to exempt operations directly linked with welfare and social security and the protection of children and young people, provided by bodies governed by public law and by operators recognised as displaying a 'social character', a distinction being drawn regarding the latter, in paragraph 2(a), in that they may make the grant of an exemption subject to fulfilment of one or more of the conditions set out, including that of not systematically aiming to make a profit, that of being run on a voluntary basis or that of applying approved prices or prices lower that market prices.

38I have already said that that provision does not mean that a profit-making organisation cannot be regarded as being of a 'social character' and it should now be

27 — It is not without purpose that the last indent of Article 13A (2)(a) of the Sixth Directive precludes the Member States from causing, in the exercise of their discretion, distortions of competition detrimental to commercial undertakings that are liable to the tax.

emphasised that, as the Commission submits, there is likewise no obligation to attribute that status to any undertaking which provides services relating to the exempted activities, since such a course of action, apart from rendering both provisions pointless, would convert the exception into a general rule. Consequently, the Member States must appraise the kind of business, and also the organisational structure used for the business and the manner in which it is 28 conducted.

39In those circumstances, a system like that provided for by the Care Standards Act 2000, which, by means of registration with the National Care Standards Commission, grants the status of 'charitable organisation' to those welfare organisations which meet the conditions laid down in the United Kingdom legislation, subject to constant monitoring by an ad hoc body, which may require the fulfilment of further conditions within the strict confines laid down by the legislature, appears to meet the requirements described earlier, although, as already indicated in Kügler and Dornier (paragraphs 57 and 74 respectively), that assessment is a matter for the referring court.

28 — These observations do not detract from the objective character of the exemption, which still takes account of the nature of the activity, although they limit it subjectively, requiring the fulfilment of certain conditions by the bodies providing the exempt services in order for the benefit of the exemption to be operative.

VI — Conclusion

40In view of the foregoing considerations, I propose that the Court of Justice give the following answers to the questions submitted by the VAT and Duties Tribunal:

'(1) In order to clarify the meaning of the expression "charitable" contained in Article 13A(1)(g) and (h) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, reference must be made to the other language versions of those provisions, and the term cannot be given the meaning which it has in national law if that would lead to divergent interpretations.

(2) The fact that an economic operator who carries out operations treated as exempt by Article 13A(1)(g) and (h) of the Sixth Directive aims at making a profit does not in principle constitute an obstacle to its being regarded as a "charitable organisation".

(3) The Member States enjoy a discretion as to whether to grant a private entity, for the purposes of the abovementioned provisions, the status of a "charitable organisation", but, when exercising that discretion, they must observe the principle of neutrality of VAT and the principle of equal treatment as between taxable persons and must have regard to the nature of the activity and the aims for which it is carried on, so that it is classified by reference to predetermined, objective and abstract criteria which take account of the nature of the business, its organisational structure and the manner in which it is conducted. In all cases, it is for the national court to appraise the extent to which such limitations are complied with.'