Pasante Healthcare Ltd v Revenue & Customs [2006] UKVAT V19724 (22 August 2006)
19724
ZERO-RATING – Charities – Medicinal products – Condoms – Supply by distributor to charity which gives condoms to clients – Whether condoms are "medicinal products" – Whether articles "for use … by being administered to a human being … for a medicinal purpose" – Yes – VAT Act 1994 Sch 8 Gp 15 item 9 and Note (11)
LONDON TRIBUNAL CENTRE
PASANTE HEALTHCARE LTD Appellant
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: STEPHEN OLIVER QC (Chairman)
TYM MARSH
Sitting in public in London on 7 August 2006
Timothy Brown, counsel, instructed by Chiltern plc, for the Appellant
Anna Markham, counsel, instructed by the acting solicitor and general counsel to HMRC, for the Respondents
© CROWN COPYRIGHT 2006
DECISION
- Pasante Healthcare Ltd ("Pasante") appeals against a decision of the Commissioners ("the Customs") contained in a letter dated 23 November 2005 stating that the supply of condoms to charities does not qualify for zero-rating under item 9, Group 15 of Schedule 8 of the Value Added Tax Act 1994 ("the Act").
Background
- Pasante's business is the wholesale of healthcare products including condoms and associated products. It has made (what it has claimed to be) zero-rated supplies of condoms to registered charities which had completed and signed declarations, provided by Pasante, to the effect that the goods were being used by the relevant charity solely in medical care, treatment or research as set out in item 9 of Group 15 of Schedule 8 to the Act.
- Evidence was given by Jane Hughes, chief executive of West Pennine Brook Advisory Centre. She explained that West Pennine Brook is an organization that provides free and confidential sexual health advice and contraception to young people up to the age of 25. West Pennine Brook has been purchasing condoms from Pasante for six years; it purchases condoms from other suppliers of medical products as well. When West Pennine Brook orders condoms, it provides Pasante and its other suppliers with a certificate to confirm that it has purchased the condoms solely for the purpose of medical care.
- When a client comes to West Pennine Brook for advice, he or she is seen first by one of the nurses or health advisers. If the client is under the age of sixteen years, he or she is assessed against the "Fraser" guidelines (often referred to as Gillick Competence). All clients are asked if they know how to use condoms and a condom demonstration is provided where necessary. Information about sexual health and emergency contraception are also provided to all clients in case of damage to a condom.
- Once the nurse or health adviser has seen the client, the client is then provided with a condom free-of-charge. After a client has seen the nurse or health adviser, he is, if he is an older person, able to come to the centre to collect condoms free-of-charge from the reception information worker at any time that the centre is open. Younger clients will continue to be seen on a regular basis or even at each visit.
- Following an assurance visit to Pasante, the Customs wrote on 23 November 2005 stating the supply of condoms to charities did not qualify for zero-rating under item 9 of Group 15 of Schedule 8 to the Act as they were not medicinal products (by virtue of not being administered). On 6 February 2006 a notice of assessment was issued to Pasante in the sum of £22,325 plus interest.
The law
- Section 30(2) of the Act states:
"A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for a time being in Schedule 8 or the supply is of a description for the time being so specified."
- Schedule 8 to the Act specifies the goods, services and supplies qualifying for the purposes of section 30(2) of the Act, including (at item 9 of Group 15 of Schedule 8):
"The supply to a charity, providing care or medical or surgical treatment for human beings or animals, or engaging in medical or veterinary research, of a medicinal product where the supply is solely for use by the charity in such care, treatment or research."
Item 9 is qualified by Note (11) to Group 15. This provides:
"In item 9 –
(a) A "medicinal product" means any substance or article (not being an instrument, apparatus or appliance) which is for use wholly or mainly in either or both of the following ways
(i) by being administered to one or more human beings or animals for a medicinal purpose;
(ii) as an ingredient in the preparation of a substance or article which is to be administered to one or more human beings or animals for a medicinal purpose;
(b) A "medicinal purpose" has the meaning assigned to it by section 130(2) of the Medicines Act 1968;
(c) "Administer" has the meaning assigned to it by section 130(9) of the Medicines Act 1968."
- The definition of "medicinal product" set out in Note (11)(a) matches the definition of "medicinal product" in section 130(1) of the Medicines Act 1968.
- Section 130(2) of the Medicines Act 1968 defines "a medicinal purpose" as including "treating or preventing disease" and "contraception".
- Section 130(9) of the Medicines Act 1968 provides as follows:
"In this Act, "administer" means administer to a human being or an animal, whether orally, by injection or by introduction into the body in any other way, or by external application, whether by direct contact with the body or not; and any reference in this Act to administering or feeding a substance or article is a reference to administering or feeding it either in its existing state or after it has been dissolved or dispersed in, or diluted or mixed with, some other substance used as a vehicle."
The case for the Customs
- The Customs' case is that the supply of the relevant products by Pasante does not qualify for zero-rating because they are not "medicinal products" for the purposes of item 9 of Group 15 of Schedule 8 to the Act. The condoms, say the Commissioners, are not administered as that word is defined in section 130(9). They are simply supplied to persons for use. Accordingly, they do not satisfy the test set out at Note (11) to Group 15, in that they are not for use wholly or mainly in either or both of the ways set out at (a)(i) and (ii) of that Note. For that reason they are not "medicinal products" for the purposes of item 9 and therefore do not qualify for zero-rating by virtue of section 30(2) of the Act.
The case for Pasante
- Pasante argues that the products supplied are "medicinal products" in that they are for use as being "administered" to a human body as the term "administer" is defined in section 130(9) of the Medicines Act 1968 for the purposes of the definition of "medicinal product" in Note (11).
Conclusions
- It is common ground that a condom has a "medicinal purpose" within the meaning of that expression in section 130(2) of the Medicines Act 1968. (It qualifies, in our view, under either or both of the headings "preventing disease" and "contraception".) It is also common ground that a condom is not excluded from the definition of "medicinal product" in Note (11)(a) to Group 15 by the words "(not being an instrument, apparatus or appliance)". Consequently the issue for us is whether, in the circumstances of the supplies to which this appeal relates, the condom in question is an "article … which is for use … (i) by being administered to one or more human beings for", what is admitted to be, "a medicinal purpose".
- The scope of the expression "for use by being administered to" depends on the context. In the present case the expression is found in a context that refers to both substances and articles; it covers the situation where the substance or article is for use by being administered to a human body and where the substance or article is for use as an ingredient in the preparation of some other substance or article. This suggests that the word "administered" is used in a wider sense than the meaning "given as medicine to". We mention that because the Customs, in support of their argument that the condom is not in the present circumstances administered, but instead "supplied to young persons for use", rely on the sixth meaning given to the word "administer" in the Shorter Oxford English Dictionary (fifth edition) which reads:
"6. Formerly, apply (a branch of medicine). Now, give (medicine, to)".
Were the word "administer" found in the context of supplies of medicines alone, that could be the appropriate definition. But the context is wider. It covers the supplies of "articles". The definition of "administer" in section 130(9), which the Customs accept as including "self-administer", refers to the manner of administration of such articles; they are administered when introduced into the body by any way "or by external application, whether by direct contact with the body or not". And when, as here, the article is a condom, the "medicinal purpose" of which is prevention of disease or contraception, it seems to us that Note (11) fairly and without undue straining of its meaning covers the circumstances described in paragraphs 4 and 5 above. The condoms supplied by Pasante to the charities are articles for use by being administered to its clients.
- We prefer the meaning of "administer" canvassed by Pasante, i.e. that the condoms "are for use by being administered to a human body". It falls within an accepted meaning of the word in the Shorter Oxford English Dictionary, i.e.
"4. Furnish, supply, give, (orig. something beneficial to)"
Moreover Pasante's construction recognizes the self-evident feature of Note (11) which is that the substance or article supplied to the charity is not required to be for use by the charity itself "by being administered to" a human body for a medicinal purpose. The charity has to see to it that the condoms are used for the statutory purpose; but the words of Note (11) envisage that the actual administration (as defined in section 130(9)), e.g. by external application, will be carried out by a third party such as the charity's client.
- For all those reasons we allow the appeal.
- We add two footnotes.
- First, the Customs relied on a passage from a VAT tribunal decision (No.12252) given in 1994. That case, Bio Oil Research Ltd, was concerned with the meaning of the term "any goods" for the purposes of item 1 Group 14 in Schedule 5 to VAT Act 1983 and in Category 3 in Annex H to the Sixth Directive. The question at issue was whether supplies of evening primrose oil products for the treatment of certain diseases came within the relevant term. In Annex H to the Sixth Directive, which lists the supplies of goods and services which may be the subject of reduced rates of tax, Category 3 contains the following description:
"Pharmaceutical products of a kind normally used for healthcare, prevention of diseases and treatment for medical and veterinary purposes, including products used for contraception and sanitary protection."
The tribunal observed that those words contrasted with section 130 of the Medicines Act 1968 which restricts "medicinal products" to substances and articles "used by being administered … for a medicinal purpose". The tribunal went on to say:
"To incorporate the words "by being administered" is severely to restrict the application of the words in Category 3 so that, for instance, most contraceptive products … would be excluded from zero-rating."
That decision was, we observe, concerned with a different product and a different statutory provision. The words taken by the Tribunal from section 130 of the Medicines Act 1968 came from subsection (1) which defines "medicinal product" and the application of subsection (9) was not taken into account by the Tribunal. We have therefore placed no reliance on Bio Oil Research.
- Second, the Customs pointed out that their case that condoms are not "medicinal products" for purposes of item 9 of Group 5 of Schedule 8 is in line with the legislation covering the regulation of Medicines and Healthcare products. They referred to Bulletin No.17 of the Medicines and Healthcare products Regulatory Agency "Medical Devices and Medicinal Products", amended in April 2006 ("the Bulletin"). The purpose of the Bulletin, as explained in the introduction, is to set out:
"… in broad terms, the regulation of specific products and distinguishes those which are regulated as medical devices and those which are regulated as medicinal products, particularly where the regulations may be on the border line between the two sets of regulations."
The Bulletin sets out the legislative materials covering medical devices and medicinal products respectively; medical devices are regulated by three main European Directives, and medicinal products by the medicines legislation, of which the main statute is the Medicines Act. The second page of the text of the Bulletin shows that products making medical claims, as a general rule, will be regulated either by the Medical Devices Regulations or by medicines legislation. In this section "Determination of Regulatory Route" it goes to say as follows:
"In the case of a medical device, the principal intended action is typically fulfilled by physical means (including mechanical action, physical barrier, replacement of, or support to, organs of body functions). The action of a medicinal product is typically achieved by pharmacological, immunological, or metabolic means; as substance administered for diagnostic purposes, even though it does not act in such ways, is also usually considered to be a medicinal product."
- The analysis of the action of a medicinal product for regulatory purposes is, it is said by the Customs, helpful in that it supports what they contend to be the type of substance that is capable of being "administered" (i.e. a substance which works in the way set out in the Bulletin in relation to medicinal products). The Customs go on to point to Annex 1 to the Bulletin which sets out a list of products in a table setting out whether each product is regulated by the Medical Device Regulations ("MDR") or by the medicines legislation. The item numbered 20c in that table is "Condoms with/out spermicide" and the table shows that they are regulated by the MDR and not under the medicines legislation. Accordingly, the regulatory authority regulating medicines and related products and devices does not treat condoms as being included among "medicinal products" for the purposes of the Medicines Act. In the circumstances, the Customs point out, it would be bizarre if they were to be treated as included within "medicinal products" for the purposes of the VAT legislation, particularly given that the definition of "medicinal products" is identical in the Medicines Act and the VAT legislation.
- We recognize that our conclusion against the Customs on this point cuts across the distinction in the regulatory provisions between medicinal products regulated under the Medicines Act and medical devices regulated under the MDR. That however is the effect of Note (11) which specifically includes "articles" within the scope of medicinal product and incorporates a definition of "administer" that envisages the article being used as a medical device.
Costs
- Following our decision in favour of Pasante, we award them their costs of an amount to be agreed. If that amount cannot be agreed, the matter should be referred back to the Tribunal (chairman alone) for a further direction.
STEPHEN OLIVER QC
CHAIRMAN
RELEASED: 22 August 2006
LON/2006/118
