Milton Keynes Hospitals NHS Foundation Trust
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 April 2019 |
| Neutral Citation | [2019] UKFTT 330 (TC) |
| Date | 29 April 2019 |
| Court | First-tier Tribunal (Tax Chamber) |
[2019] UKFTT 330 (TC)
Judge Barbara Mosedale
Mr D Southern QC, appeared for the appellant
Ms V Sloane QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Whether overclaims of COS VAT can be recovered by HMRC under VATA 1994, s. 73 – Yes.
The Trust recovered VAT incurred on IT expenditure which HMRC decided had been claimed in error. NHS Trusts are entitled to recover VAT on contracted out services (COS) under s. 41 VATA 1994. HMRC issued an assessment under s. 73 VATA 1994 to recover this overclaimed VAT, but the Trust argued that the assessment was invalid because s. 73 VATA cannot be used to correct claims made under s. 41. The appeal was dismissed.
The Trust recovered VAT incurred on IT expenditure which HMRC decided had been claimed in error. NHS Trusts are entitled to recover VAT on contracted out services (COS) under s. 41 VATA 1994. HMRC issued an assessment under s. 73 VATA 1994 to recover this overclaimed VAT, but the Trust argued that the assessment was invalid because s. 73 VATA cannot be used to correct claims made under s. 41.
This hearing only considered whether HMRC had issued a valid assessment.
The FTT rejected the Trust's argument that HMRC could not issue an assessment under s. 73(2) VATA 1994. 73(2) reads as follows:
In any case where, for any prescribed accounting period, there has been paid or credited to any person–
- as being a repayment or refund of VAT, or
- as being due to him as a VAT credit,
an amount which ought not to have been so paid or credited, or which would not have been so paid or credited had the facts been known or been as they later turn out to be, the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly.
The Trusts argument centred around the fact that disputes concerning s. 41 claims are normally dealt with by judicial review because such claims are not listed as an appealable matter in s. 83 VATA 1994. It followed, the Trust argued, that it cannot have been parliament's intention that s. 73(2) be used to issue assessments. However, the FTT branded this approach “fundamentally flawed” (para. 35) and determined that s. 73(2) should be read literally and did give HMRC the power to assess the Trust for overclaimed VAT.
Having dismissed the appeal the FTT will consider whether the assessment was correct in a separate hearing.
It is apparent that the FTT was unimpressed with the Trust's argument that it could not be assessed for any errors in its VAT claims for the relevant periods. We await the FTT's decision on the substantive issue of whether the VAT incurred on IT services was claimable with interest.
[1] The appeal concerns VAT which the appellant paid when acting as a public authority. In particular, it incurred expenditure on new IT equipment. It recovered this VAT from HMRC, but HMRC have now assessed it under s 73 Value Added Tax Act to recover some £114,998 of the VAT recovered on the basis that (says HMRC) the appellant had no right to reclaim it.
[2] The appellant's right to recover VAT which it pays when acting as a public authority derives from the Value Added Tax Act 1994 (“VATA”). S 41 VATA provides:
(3) Where VAT is chargeable on the supply of goods or services to a Government department … and the supply … is not for the purpose–
- of any business carried on by the department, or
- of a supply by the department which, by virtue of s 41A is treated as a supply in the course or furtherance of a business,
then, if and to the extent that the Treasury so direct and subject to subjection (4) below, the Commissioners shall, on a claim made by the department at such time and in such form ad manner as the Commissioners may determine, refund to it the amount of the VAT so chargeable.
[3] An NHS Trust, such as the appellant is deemed to be a “Government department” for the purpose of s 41 by s 41(7).
[4] The parties were agreed that the VAT the subject of the appeal was VAT which was incurred by the appellant other than in the course of any business or deemed business; they did not agree whether it was VAT which fell within the directions made by the Treasury under s 41(3).
[5] It was agreed that the VAT in dispute had been recovered by the appellant in various VAT returns in the financial years 2013/14, 2014/15 and 2015/16. HMRC had assessed the appellant to recover it on 11 July 2017. The appellant appealed the assessment to this Tribunal (“the FTT”).
[6] The parties were (obviously) in dispute over whether or not the appellant had been entitled to recover the VAT on the IT services concerned; but they were also not agreed on whether, assuming that the appellant was not entitled to recover the VAT under s 41 VATA, HMRC were able to raise a s 73 VATA assessment in order to recover VAT over-claimed under s 41. It was this latter question which was set down as a preliminary issue as it had the potential to resolve the dispute because, if the assessment was invalid, the appeal must be allowed.
[7] One point to state at the outset is that it was implicitly accepted by all parties that the appellant, as any other NHS Health Trust, although deemed by s 41(7) VATA to be a Government department for the purposes of VAT, is not in law a department of the Government and therefore it is possible for it to be assessed by, and for it to sue, the Government, in the form of HMRC.
[8] The appellant's position was that the assessment the subject of the appeal was invalid because s 73 could not be used to assess amounts recovered under the s 41 procedure. It supported its position by reference to the EU and UK VAT systems and case law, and Parliament's presumed intentions.
[9] HMRC's position was that s 73 was clearly applicable to any amounts of VAT wrongly recovered by the appellant and there was nothing in the EU or UK VAT systems, the case law, or Parliament's presumed intentions, that suggested otherwise.
[10] In order to decide the preliminary issue, I will therefore consider in turn:
- The EU VAT system (including its relevant case law);
- The UK VAT system (including its relevant case law); and
- Parliament's presumed intentions.
[11] Mr Southern went through the EU VAT provisions in some detail but I only give an overview here as there was no difference between the parties on the issue.
[12] The parties were agreed that VATA was intended to implement the EU's Principle VAT Directive (“PVD”). They were agreed that the PVD did not give the appellant any right to recover the VAT at issue in this appeal. This was because, in general, the PVD did not treat a public body acting as such as a taxable person: see Ufficio Distrettuale delle Imposte Dirette di Fiorenzuola d'Arda v Comune di Carpaneto Piacentino and Ufficio Provinciale Imposta Sul Valore Aggiunto di Piacenza (Joined Cases 231/87 and 129/88) [1991] BVC 70 where the ECJ explained the fundamental difference between public bodies acting as such and taxable persons. Under the PVD, only taxable persons have a right to recover VAT which they incur: see Elida Gibbs Ltd v C & E Commrs (Case C-317/94) [1997] BVC 80 at [22]–[24] where the ECJ said only taxable persons could deduct input VAT. And while there were two situations in art 13 PVD where the PVD would treat a public body acting as such as a taxable person, those exceptions only applied when (a) there were significant distortions of competition or (b) the activity was non-negligible and listed in Annex I to the PVD. I will not refer to these exceptions again: they were not relevant in this case where it was accepted that the VAT on the IT services in issue was incurred by the appellant acting as a health service provider and neither exception (a) nor (b) applied.
[13] While HMRC accepted Mr Southern's summary of the EU law position and in particular that the PVD gave the appellant no right to recover VAT incurred by it in carrying out its function as an NHS trust, they did not accept that that had any relevance to the question of whether s 73 VATA allowed HMRC to assess when an NHS trust wrongly recovered VAT incurred by it in carrying out its function as an NHS trust.
[14] In particular, there was no suggestion by the appellant that the UK acted unlawfully under EU law in giving a VAT refund to public bodies. Indeed, the UK is not the only Member State to do so and the EU Commission considered it (with approval) in a paper entitled “VAT in the Public Sector and exemption in the public interest” in 2011 where they said:
5.2 Refund system
The main problem with the current VAT treatment of the public sectors outsourcing is connected with the non-deductibility of input VAT. Under a system where the supplies of public sector entities are either non-taxable or taxable but tax exempt the deduction of input VAT is not possible. This leads to a self-supply bias, disincentives to invest and a cascade effect. A refund system would solve the problem with the input VAT. The idea of compensation is not new. Several Member States are already operating refund systems outside of the VAT system.
[15] In other words, the purpose of refunding public sector VAT is to avoid a bias by public bodies towards undertaking activities in-house which might have been outsourced but for the fact that external contractors must charge VAT. And it is lawful for a member State to do this. The EU Commission approves it. There is nothing in the PVD which would make it unlawful albeit there is nothing which authorises it either.
[16] S 41 VATA is therefore not authorised by the PVD but it is not unlawful under the PVD either. I have set it out at para. 2 above. It permitted designated bodies,...
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