NHS Dumfries and Galloway Health Board
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 March 2014 |
| Neutral Citation | [2014] UKFTT 242 (TC) |
| Date | 04 March 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 242 (TC)
Judge Kenneth Mure, QC, Mr S A Rae, LLB, WS, Mr P R Sheppard, FCIS, FCIB, CTA.
David Southern, Barrister appeared for the Appellants
Sean Smith, QC and Ian Mowat, Solicitor, Office of the Advocate General for Scotland appeared for the Respondents
Value added tax - (1) Recoverable output tax - Fleming rule/Finance Act 2008 ("FA 2008"), Finance Act 2008 section 121s. 121 - Principles of quantification - (2) Whether original claim susceptible of amendment - No - Appeal allowed in part.
The First-tier Tribunal (FTT) allowed in part the appeal by the taxpayer Appellant against HMRC's decision that it could not belatedly recover output tax that had been incorrectly paid on certain supplies at dining rooms in hospitals.
The Appellant ran hospital dining rooms, which were used by staff and visitors. Staff could take hot or cold food for consumption at their desks where they worked.
Public bodies generally carry on non-business activities, but often also conduct other activities, which are within the VAT system. Thus, they may recover input tax and are accountable for output tax. Where a public body carries on a business, it is treated similarly to a private trader for VAT purposes.
The appeal relates to a claim for repayment of output tax paid incorrectly in respect of zero-rated and exempt supplies for the period from 1 April 1974 to 4 December 1996 ("the Fleming period") and primarily concerns supplies of food and catering by the Appellant.
The matters in dispute included whether the tax repayment claimed for the period before May 1984 (including repayment for hot takeaways) was part of an existing claim, or was a new claim, and as such out of time and irrecoverable. Otherwise, what is the percentage that should be used to calculate the amount of zero-rated supplies, i.e. the zero-rated percentage ("ZRP") in respect of which output tax paid can now be recovered? No record of zero-rated supplies had been kept at the point of sale.
The supply of food for consumption on the supplier's premises is standard-rated. Takeaways are zero-rated, except in the case of hot food which became standard-rated after May 1984 whether or not consumed on the premises. Zero-rating applies to supplies of sandwiches for staff to eat at their immediate work-place or elsewhere, rather than in a staff canteen or dining room. Catering for students was considered by the FTT to be VAT exempt (para. 37 of the decision).
The FTT helped the parties to agree a formula to reflect the non-taxable proportion. This formed the basis of the repayment claim. However, insofar as the Appellant tried to increase its claim by reference to hot takeaways supplied before May 1984, the appeal was refused.
Having agreed the formula, it only remains for the parties to agree the quantum of the claim. This case is similar to St George's Healthcare NHS TrustTAX[2014] TC 03308 where the FTT helped the parties agree a Fleming claim, but that related to input tax.
[1]By way of introduction Mr Southern on behalf of the appellant addressed us briefly. He explained the "historical" background to claims of this nature. Public bodies by and large carried on non-business activities, but commonly also conducted other activities which were within the VAT system. Thus they could recover input tax and became accountable for output tax. Where a public body carried on a business, it was treated similarly to a private trader for VAT purposes.
[2]Historically, output tax had been paid to HMRC by public authorities in error to a certain extent and this was properly recoverable. Mr Southern noted the decision in Fleming (t/a Bodycraft) v R & C CommrsVAT[2008] BVC 221, which enabled the recovery of input tax incurred over an extended period. That principle is now incorporated in section 121section 121, FA 2008. This appeal relates to a claim for repayment of output tax paid incorrectly in respect of zero rated and exempt supplies over the 23 year period from 1 April 1974 to 4 December 1996 (described herein as "the Fleming period") and is primarily concerned with supplies of catering by the appellant.
[3]Mr Southern referred us to his Skeleton Argument and para 43 thereof. The matters in dispute included whether the tax repayment now claimed for the period before May 1984 (including repayment for hot "takeaways") was part of an existing claim or a new claim, and as such out of time and irrecoverable. Otherwise, what is the percentage which should be applied to calculate the amount of zero-rated supplies ie the zero-rated percentage or "ZRP" in respect of which output tax paid can now be recovered? (As explained infra this should include exempt supplies too.) In particular is it 18.08% as submitted by the appellant, or about 15% as suggested in correspondence by HMRC, or otherwise?
[4]In this context regard had to be paid to changes in eating habits. There had been a change from "set" meals to sandwich takeaways. The latter were zero-rated, but were less popular in the 1970's and 1980's. The Tribunal had to consider, Mr Southern submitted, whether his client's approach and calculations were reasonable and the methodology robust.
[5]The appellants had proposed initially a figure of 20.11% as representing zero-rated sales, but later restricted this to 18.08%. Mr Southern referred to p68 and 135 in the documents. He submitted that VAT charged on supplies which were properly exempt should be included in this calculation too.
[6]A common Bundle of Authorities was prepared for this and the other related Health Board appeals. These are listed in the Appendix hereto.
[7]The appellant's first witness was Christine Carruthers. She is currently Accounts Service Manager with Forth Valley Health Board. (She has never worked for Dumfries & Galloway, the appellant in this case, but is conversant with the accounting systems operated by the Scottish Health Boards.)
[8]Miss Carruthers read and adopted her Witness Statement. She spoke to her personal experience of hospital dining-rooms as run by certain of the Scottish Health Boards, and which were commonly used by staff and visitors alike. Staff could take food for consumption at their desks where they worked. This could be hot or cold, breakfast rolls being particularly popular.
[9]The matter of VAT recovery had tended to be neglected prior to 1993 in spite of information circulated by government. However, "blue books" were prepared annually for the Scottish Health Boards. These were financial and costs records maintained for management accountancy purposes, and the information contained therein provided a valuable reference in preparing such repayment claims.
[10]Although Miss Carruthers has not been employed by this appellant Health Board, she has worked for others and gave, in our view, helpful and reliable evidence as to their practices in relation to internally-run catering facilities.
[11]The appellant's next witness was Ross William Muir. He is an accountancy and economics graduate, who has advised clients on indirect taxation throughout his career. He is employed by a specialist VAT Consultancy, Liaison, based in Bristol. Mr Muir himself works locally and has advised several Scottish health bodies.
[12]Mr Muir read and confirmed the terms of his Witness Statement. He spoke to the calculations on which the Fleming repayment claim was based. He explained the catering sample exercise undertaken for the appellant over a representative seven day period in October/November 2007. Essentially the exercise was an attempt to apportion standard-rated and zero-rated supplies. (There was no zero-rated record kept at the point of sale.) Basically the former supplies were food consumed on the premises, while the latter were takeaways. The procedure followed HMRC guidance. A percentage of 20.11% in respect of zero-rated sales resulted. The sample exercise depended on written records made by catering staff at point of sale. A "breakdown" into 25 common supplies was made. HMRC by letter dated 3 March 2008 approved this percentage (docs p180), he considered.
[13]This calculation was the basis for the necessary extrapolation of recoverable VAT over the Fleming period. The calculation was supported by the availability of the "blue book" records for 11 of the 23 years. Adjustments were made firstly for inflation over the extended period by reference to the Retail Price Index. The initial percentage for zero-rated sales was reduced after consideration of "blue book" records to 18.08% (the figure founded on in submissions by Mr Southern). A further revisal of the apportionment fell to be made, according to Mr Muir, to take account of the changing pattern of consumption over the Fleming period. Formal "set" meals in restaurant and canteen facilities diminished, while takeaways, particularly sandwiches increased. The ratio of sandwiches in relation to overall takeaways has to be taken into account in "weighting" the apportionment. (The Tribunal would observe that in addition to zero-rated sales, exempt income is included in calculating the VAT recoverable. This aspect is discussed infra para 37.)
[14]In cross-examination Mr Muir was pressed about Liaison's promotional material and its declared aim of maximising recoveries. While he had to consider and advise his clients on repayments of VAT due, he indicated that Liaison's role might be described more completely as that of ensuring tax compliance.
[15]He was asked about the manner of conduct of the sampling test of 2007. He explained that a spreadsheet summary was prepared, completed at the till by staff, and finalised by the catering manager. He was referred to limited variations in the handwriting. He explained that his understanding was that the sample sheets prepared by him were sent out blank for completion by the appellant's staff as instructed.
[16]Mr Muir was...
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