NHS Lothian Health Board v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 02 July 2018 |
| Neutral Citation | [2018] UKUT 218 (TCC) |
| Date | 02 July 2018 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2018] UKUT 0218 (TCC)
Lord Tyre
Upper Tribunal (Tax and Chancery Chamber)
Value added tax – Input tax – Claim for recovery of input tax under-claimed between 1974 and 1997 – Quantification and substantiation of claim – Whether First-tier Tribunal erred in refusing appeal, because amount not quantifiable with sufficient precision – No – FA 2008, s. 121 – Board's appeal refused.
The Upper Tribunal (UT) dismissed the Board's appeal against the decision of the First-tier Tribunal (FTT) ([2017] TC 05917) to uphold HMRC's rejection of a late claim for VAT incurred as input tax between 1974 and 1997.
The appellant Board supplied through its laboratories various non-NHS bodies, such as local authorities, food and drugs manufacturers and other public bodies. It agreed with HMRC certain claims relating to VAT incurred on this including for the year 2006–07 just before the Fleming claim. Following Fleming (t/a Bodycraft) v R & C Commrs [2008] BVC 221 and FA 2008, s. 121(1), the appellant submitted a claim using the 2006–07 percentage of 14.70%. This was based on establishing a ratio of business/non-business income and applying this percentage to VAT incurred on its taxable costs. The appellant claimed that this was typical for an NHS laboratory. In the absence of primary records, the appellant used the NHS “Blue Books” which contained financial records, although they do not satisfactorily record income. The Fleming claim was submitted in March 2009 and rejected by HMRC. Later it was significantly reduced during negotiations.
HMRC argued that there was no evidence of taxable supplies or of taxable income, the methodology was unsuitable and flawed, no partial exemption calculation had been undertaken and no direct attribution.
The appellant argued that HMRC wrongly stressed direct attribution and partial exemption. This was a calculation based on establishing business activities against the primary activities of non-business health care. The method chosen took account of this and was reasonable. Any exempt income was included in the denominator in the business/non-business calculation and there was no statutory requirement to undertake a separate partial exemption calculation. This was in line with HMRC's guidance manual. The FTT was invited to consider alternative evidence including the approach in the “best judgment” case C & E Commrs v Pegasus Birds Ltd [2004] BVC 788 at para. 38.
The appellant said there was evidence of business supplies, the year 2006–07 had been agreed with HMRC, it was a reasonable “starting point”, the method was simple and, on the balance of probabilities, the claim was fair.
HMRC said the FTT had no duty to investigate and determine a figure, or to make a best judgment, but rather should seek evidence consistent with oral evidence. There is no lower standard of proof just because it is a Fleming claim. The claim as presented before the FTT was a new claim and time-barred, as it had changed so much from the original. There was no evidence of taxable income and the last year of the Fleming claim was more than ten years since the baseline year of 2006–07. This figure might have been agreed for that year, but should not be extrapolated for previous years. In HMRC's view, direct attribution had not been used to exclude all expenditure on non-business activities.
The FTT found that it was still the same claim, having been subject through negotiations to reductions and was not time-barred. Witness statements were accepted confirming that business supplies had been made and were not exempt. It then considered the business income calculation given that the Blue Books did not show income other than catering. Lack of sales invoices or ledgers and of source documents made it difficult to confirm the accuracy of figures. Figures from 2006–07 were ten years after the last Fleming claim and almost a further 25 years to the first year. The absence of primary records for any periods in between undermined the claim. Regarding partial exemption, the FTT noted that no calculations had been made. As for direct attribution, there was doubt over whether direct attribution had been adequately dealt with given the lack of source records. Thus, the appeal was dismissed by the FTT.
The grounds of appeal to the UT were:
- the FTT had erroneously approached the matter as if it involved questions of direct attribution or partial exemption, when the appeal only involved a business/non-business apportionment claim;
- because of this, the FTT adopted an incorrect evidential standard by adopting the prescriptive approach relevant to partial exemption, when it ought to have considered whether the appellant's method produced a fair and reasonable apportionment;
- the FTT had failed to draw the correct conclusions from the evidence;
- the FTT had erred in rejecting the 14.70% figure as an appropriate baseline for the years to which the appeal related; and
- the effect of these errors was that the FTT had failed to ascertain the amount of input tax under-recovered and, moreover, thereby breached the effectiveness principle.
HMRC argued that the FTT had not erred in proceeding on the basis that direct attribution had to be undertaken as far as possible, whether that attribution was to taxable supplies, exempt supplies, or non-business activities. It was not correct that direct attribution had to be carried out only at organisational level; it had been done in the 2006–07 calculation. The evidence before the FTT related only to certain laboratories; it was insufficient to exclude the possibility that in others only non-business activities were undertaken, so that none of the input tax attributable to those laboratories was recoverable. Nor, it was submitted, could the evidence exclude the possibility that there had been exempt business income. The FTT's comment about the dearth of information concerning income was justified. In any event, its comments regarding partial exemption were made when it had already rejected the appellant's reliance on a taxable percentage of 14.70%.
The UT was not persuaded by the appellant's submission that the discussion in para. 200 and 201 indicates that the FTT confused partial exemption and business/non-business apportionment. The FTT understood the distinction. The question was whether the appellant's proposal for business/non-business apportionment was reasonable. Having found that there was no reliable means of calculating the business income received by the laboratories during the years in the Fleming period, the FTT considered the alternative method of calculation, i.e. use of the percentage agreed for the year 2006–07. The FTT stated that it did not consider such an approach to be reasonable or acceptable. Thus, the FTT applied the correct test for business/non-business apportionment. It did not apply any erroneous test derived from partial exemption (para. 20 of the decision).
In so far as the FTT considered partial exemption, the UT accepted HMRC's...
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NHS Lothian Health Board v Revenue and Customs Commissioners
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