Lothian NHS Health Board v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 May 2015 |
| Neutral Citation | [2015] UKUT 264 (TCC) |
| Date | 28 May 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Lord Tyre
Value added tax – Input tax – Claim for recovery of input tax under-claimed between 1974 and 1997 – Quantification and substantiation of claim – Whether the First-tier Tribunal erred in refusing appeal because evidence insufficient to establish a “tolerably acceptable calculation”– Value Added Tax Act (“VATA 1994”), s. 83(1)(c) – Finance Act 2008 (“FA 2008”), s. 121 – Appeal refused.
The Upper Tribunal (UT) upheld a First-tier Tribunal (FTT) decision (NHS Lothian Health Board TAX[2014] TC 03397) that the appellant had failed to prove its Fleming claim, to an acceptable standard, for the repayment of unrecovered input tax that had been paid by it on capital expenditure over the period between 1974 and 1997.
This case concerned a claim – following the judgment in Fleming (t/a Bodycraft) v R & C Commrs; Condé Nast Publications Ltd v R & C Commrs VAT[2008] BVC 221– for recovery of underclaimed input VAT for periods going back to 1973. The claim was made on the basis that the appellant health board which had been carrying on non-business activities and/ or making predominantly exempt supplies had not reclaimed input tax as it had been able to attribute wholly or partly to taxable supplies.
The total amount of allegedly underclaimed VAT which the appellant sought to recover for the relevant period was £1,416,737.87.
In order to substantiate its claim, the appellant adduced witness evidence from four witnesses of fact (its head of corporate reporting and governance and its director of operations as well as the assistant head of financial services at NHS Greater Glasgow & Clyde and the assistant director of finance with NHS Forth Valley) together with a VAT consultant with experience in advising NHS bodies. The VAT expert had been responsible for quantifying the claim and to that aim had used the appellant's annual accounts and cost record books found in Edinburgh University Library.
The FTT found the witnesses of fact credible and reliable but observed that the evidence adduced had been of a general nature and fell short of supporting the value of the claim and the computation method.
In terms of the expert evidence, the FTT commented:
These are historical records not spoken to by those processing them or recording them. Critically, we did not hear any satisfactory evidence as to the manner and practice of their compilation and the crucial aspect of the inclusion or exclusion of VAT and any interim recovery of VAT under COS, for instance.
There was a dispute between the appellant and HMRC as to the appropriate method of apportionment of residual input tax attributable to business activities but not directly attributable to taxable or, alternatively, to exempt supplies. The appellant contended for a cost-based method and HMRC argued that an income-based method should be applied.
In the circumstances, the FTT found that despite a very limited recovery of residual input tax on capital expenditure, and despite the fact that the figures recorded for capital expenditure were VAT inclusive and that VAT recoverable on contracted-out-services had been recovered to a limited extent, the appellant had not discharged the burden of proof in relation to the amount (if any) of recoverable input tax which had not been recovered. The Tribunal decided that there remained too many imponderable factors precluding it from finding in favour of the appellant and dismissed the appeal.
The appellant contended that the FTT had erred in law in holding – notwithstanding favourable findings of fact – that the claim failed in its entirety because of methodology and quantification issues. The appellant argued that the FTT should have adopted a two-stage approach analogous to a “best judgment” assessment asking (a) is there a claim? And if so, (b) how much? As the Tribunal had answered the first question in the affirmative, it was an error of law to hold that the claim failed entirely.
On appeal, the UT (Lord Tyre) held that the FTT's decision revealed no error of law. There was no requirement for the FTT to adopt a two-stage approach in resolving an appeal against the rejection of a Fleming claim and such a claim was not analogous to a “best judgment” case where that approach may be appropriate.
The onus of proving that “an amount” of input tax has been paid and not recovered rests upon the claimant. The standard of proof is the balance of probabilities. The FTT is therefore entitled to find that a claim fails for either of two reasons:
(a) because the Tribunal is not satisfied, on the balance of probabilities, that there is any unrecovered input tax; or (b) because the Tribunal, although satisfied that there is unrecovered input tax, is unable to find, on balance of probabilities, that any particular – even a minimum – amount of input tax can be ascertained as having been paid and not recovered. In the latter alternative the Tribunal does not function as a detective with a duty to fix a figure – even a minimum figure – for input tax paid but not recovered, regardless of the quality of the evidence placed before it by the claimant.
The UT held that due to the sparse evidence available to the FTT, it had been entitled to conclude that the appellant had failed to discharge its burden of proof.
This decision explores the practical difficulties faced by public bodies in establishing a claim for recovery of historic input tax and gives emphasis to the burden of proof which rests upon a claimant.
The evidential burden which rests on a claimant is heightened in the case of public bodies where relevant documentary evidence may never have existed because the input tax in question may have been regarded as too small a fraction of the total input tax incurred by the relevant body to become an administrative priority.
In appealing a rejection of a Fleming claim, the appellant must persuade the FTT that the input tax underlying the claim had been paid and had not already been recovered and that the appellant's proposed method of attribution of any residual input tax is fair and reasonable.
David Southern QC appeared for the Appellant (Lothian NHS Health Board)
Sean Smith QC, instructed by the Office of the Advocate General for Scotland, appeared for the Respondents (HMRC)
[1] As a consequence of the decision of the House of Lords in Fleming (t/a Bodycraft) v R & C Commrs VAT[2008] BVC 221 and the subsequent amendment to the law made by the Finance Act 2008, section 121, the entitlement of traders to recover underclaimed input VAT for periods going back as far as 1973, which had been removed in 1997, was restored. Claims required to be submitted by 31 March 2009.
[2] Among the many VAT-registered bodies who made claims to recover historic input tax were public authorities carrying on mainly non-business activities and/or making predominantly exempt supplies, such as universities and health boards. In the early years of VAT, public bodies had been slow off the mark in reclaiming such input tax as they were able to attribute wholly or partly to taxable supplies. Budgetary pressures forced a change of approach, and by the 1990s public authorities were entering into partial exemption special methods and making claims for recovery of input VAT alleged to have been under-recovered in past years. The latter process was interrupted by the retrospective introduction in 1997 of the three-year cap which was ultimately held by the House of Lords in Fleming to have breached the EU principle of effectiveness. After the enactment of the Finance Act 2008, section...
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