NHS Lothian Health Board

JurisdictionUK Non-devolved
Judgment Date26 June 2017
Neutral Citation[2017] UKFTT 522 (TC)
Date26 June 2017
CourtFirst Tier Tribunal (Tax Chamber)
NHS Lothian Health Board
[2017] UKFTT 0522 (TC)

Member: Peter R Sheppard, FCIS, FCIB, CTA

Value added tax – Fleming (t/a Bodycraft) v R & C Commrs; Conde Nast Publications Ltd v R & C Commrs [2008] BVC 221 claim – Whether all supplies exempt or non-business – No – Repayment of input tax attributable to taxable supplies made from 1974 to 1997 – Whether quantifiable with sufficient precision – No – FA 2008, s. 121 – Appeal dismissed.

The First-tier Tribunal (FTT) dismissed an appeal by NHS Lothian Health Board (the appellant) against a decision by HMRC to refuse a claim for VAT incurred as input tax between 1974 and 1997.

Summary

Judge Mure sadly died before the decision could be promulgated so the decision was prepared and released by tribunal member Peter Sheppard with the agreement of all parties and the president of the Tax Chamber.

The appellant earned income from business supplies through its laboratories made to non-NHS bodies such as local authorities, food and drugs manufacturers and other public bodies. It agreed with HMRC various claims relating to VAT incurred on this including one for the year 2006–07 just prior to the Fleming claim. Following Fleming (t/a Bodycraft) v R & C Commrs; Conde Nast Publications Ltd v R & C Commrs VAT[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. In evidence one expert witness for the appellant said that this was typical for an NHS laboratory. In the absence of primary records the appellant's advisor used the NHS “Blue Books” which contained financial records, although as the FTT commented they do not satisfactorily record income. The Fleming claim was submitted in March 2009 and rejected by HMRC in 2010 and 2011, it was subsequently significantly reduced in quantum during negotiations.

HMRC in rejecting the claim said 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 was wrong to lay stress on 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 entirely 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 all in line with HMRC's own manual. The FTT was invited to consider alternative evidence including the approach of Lord Carnwath in the “best judgement” case C & E Commrs v Pegasus Birds Ltd VAT[2004] BVC 788, 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 methodology was straightforward and simple to use and on the balance of probabilities it was a fair claim.

HMRC said the FTT had no duty to investigate and determine a figure or to make a best judgement but rather should seek out 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 in fact a new claim and therefore 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 10 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, see para. 187 of the decision. Witness statements were accepted confirming that business supplies had been made, see para. 189 and were not exempt, see para. 190. 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, see para. 193. 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, see para. 199. Regarding partial exemption the FTT noted that no calculations had been made, see para. 200. As for direct attribution there was a question-mark over whether direct attribution had been adequately dealt with given the lack of source records, see para. 201. The appeal was therefore dismissed.

Comment

Although the window for Fleming claims is now shut this case highlights the approach of the tribunal in dealing with historical claims and that the production of source documentation is still required. Taxpayers cannot simply identify a figure from an exercise in advance of the claim periods and extrapolate that figure to historical periods. Sectors where this might be pertinent include the charity and education sectors.

David Southern, QC, instructed by Liaison Financial Services Limited, appeared for the appellant

Sean Smith, QC, instructed by Douglas Pate, Solicitor, Office of the Advocate General for Scotland, appeared for the respondents

DECISION
Introduction

[1] The hearing of this appeal took place before Judge Kenneth Mure QC and Mr. Peter Sheppard FCIS FCIB CTA. Judge Mure died suddenly and unexpectedly before a decision could be released. This decision has been prepared by Mr. Sheppard, with the agreement of the parties and by authority of the president of the Tax Chamber.

[2] This is a claim for repayment of input tax relating to taxable services supplied by the appellant's laboratories during the period 1974 to 1997. These were rendered to private (non-NHS) customers such as local authorities, other public bodies, and foods and drugs manufacturers.

The law

[3] In addition to the relevant statutory provisions, particularly FA 2008 section 121, the Tribunal was referred extensively to many authorities, documents and publications. Those which the Tribunal considered relevant are set out in a list which is appended hereto as Appendix A. Section 121(1) provides:–

(1) the requirement in section 80(4) of VATA 1994 that a claim under that section be made within 3 years of the relevant date does not apply to a claim in respect of an amount brought into account, or paid, for a prescribed accounting period ending before 4 December 1996 if the claim is made before 1 April 2009.

Evidence

[4] In addition to settling an Agreed Statement of Facts both parties led extensive witness evidence. On the first two days of the hearing the Tribunal heard brief introductory evidence from the appellant's witnesses who could speak to the pattern of the laboratories' activities at the material time, sources of income, and various aspects of the accounting systems then in place. Each read out his or her Witness Statement, was then asked any supplementary questions and thereafter cross-examined.

[5] Firstly Linda Mulhern gave evidence (vol 5, tab 7). She is the operational science manager in microbiology. She has responsibility for the microbiology laboratories of the appellant Health Board, attends at the new Royal Infirmary and St John's Hospital, and has responsibility for health and safety in the microbiology laboratories.

[6] She started work with the appellant in 1988 as a trainee bio-medical scientist. She holds an honours degree in microbiology and a master's degree too. She became a senior bio-medical scientist in 1997.

[7] Mrs Mulhern explained that the appellant carried out work for external agencies. Borders Council would send water samples for testing. Oysters, milk and cream were also tested. Eggs were checked for salmonella. The laboratories were in the hospital grounds. She remembered the food testing which was being carried out when she started in 1988. It continued until at least 1996.

[8] Medical care for patients included checking samples of body fluids and swabs. The laboratories undertook general public health work too. The laboratories carried out National External Quality Assessment Scheme (“NEQAS”) work. Also, the laboratories conducted drugs research work, often at weekends and in the evening. Mrs Mulhern considered that 70% of the laboratories' work was for the NHS and the balance for external, private work. Public health work, she said, reduced towards the end of the 1990s.

[9] Mrs Mulhern was not cross-examined. She confirmed to the Tribunal that she was not registered as a medical practitioner.

[10] Then Miss Gillian Fewster gave evidence (vol 5, tab 6). She is deputy health and safety officer for microbiology and bio-medical scientist team manager. She is involved also with diagnostic microbiology. She started working for the NHS in 1973 at the Western General Hospital. She became an advanced bio-medical scientist in 1993.

[11] At the Western General Miss Fewster was involved in processing and reporting on private samples, including work for public health departments of various local authorities, examining water, milk, creams, swimming baths' water, shell fish, certain food samples and sewer swabs.

[12] Miss Fewster had undertaken research and development work for a period, for which she was paid additionally. Also she had tested cattle and poultry samples for bacteria harmful to humans, including milk-testing. Her public health work ceased in about 1993, then re-started for a period with another manager, until this work was transferred to the City Analysis Laboratory in 2000.

[13] Miss Fewster indicated that she was registered...

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1 cases
  • NHS Lothian Health Board v Revenue and Customs Commissioners
    • United Kingdom
    • Supreme Court (Scotland)
    • 19 October 2022
    ...holding that HMRC were entitled to conclude that NHS Lothian had failed to establish how much input tax it was entitled to recover: [2017] UKFTT 522 (TC). That decision was upheld by the Upper Tribunal (Lord Tyre) [2018] UKUT 218 (TCC), [2018] STC 1745. On further appeal, however, the Fi......

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