NHS Lothian Health Board v Revenue and Customs Commissioners

JudgeLady Rose,Lord Reed,Lord Briggs,Lord Sales,Lord Leggatt
Judgment Date19 October 2022
Neutral Citation[2022] UKSC 28
CourtSupreme Court (Scotland)
Commissioners for His Majesty's Revenue and Customs
NHS Lothian Health Board
(Respondent) (Scotland)

[2022] UKSC 28


Lord Reed, President

Lord Briggs

Lord Sales

Lord Leggatt

Lady Rose

Supreme Court

Michaelmas Term

On appeal from: [2020] CSIH 14


David Thomson KC

Ross Anderson

(Instructed by Advocate General (Scotland))


David Southern KC

Denis Edwards

(Instructed by Clyde & Co LLP (London))

Heard on 8 and 9 June 2022

Lady Rose ( with whom Lord Reed, Lord Briggs, Lord Sales and Lord Leggatt agree):

1. Introduction

The respondent, NHS Lothian Health Board (“NHS Lothian”), is one of a number of Scottish NHS Boards which have submitted late claims to the appellants, HMRC, seeking to recover VAT input tax that they paid many years ago when buying in goods and services. This appeal concerns VAT inputs incurred in the course of the work of laboratories within NHS Lothian's remit. Those laboratories primarily provided clinical services for NHS Lothian hospitals and clinics but they also provided some services to outside bodies for which they charged fees. It is accepted by HMRC that the services provided by the laboratories to outside customers constituted a business activity for VAT purposes so that NHS Lothian could have claimed to recover a proportion of the input VAT they paid, that proportion reflecting the proportion of the totality of the laboratories' work that amounted to such business activity.


The years for which NHS Lothian now claims to recover input tax are the years from 1 April 1974 when VAT was first introduced in the United Kingdom to 30 April 1997 (“the claim period”). Because of a series of legislative measures which I describe further below, a window of opportunity was opened up by section 121 of the Finance Act 2008 enabling taxable persons to claim unrecovered input VAT for those years, provided they lodged their claim by 31 March 2009.


When NHS Lothian submitted their claim in March 2009, they valued the input tax to which they were entitled as over £7 million. Following lengthy correspondence between the parties in which HMRC asked for further evidence to support the claim, HMRC rejected NHS Lothian's claim in full by letter dated 23 December 2010 setting out their reasons. The first reason given was that the claim used a percentage to calculate the recoverable input tax but that the method used to apportion general expenditure between business and non-business expenditure had not been explained. Other reasons were that NHS Lothian had not shown that the input tax claimed had not already been recovered by it previously and had not explained why the annual input tax claimed for some of the earlier years was over four times higher than the input tax being claimed in the then current year.


Following the rejection of the claim, NHS Lothian appealed to the First-tier tribunal (“the FTT”). By that stage the value of the claim had been reduced to £900,000. The FTT dismissed the appeal, 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 First Division of the Inner House of the Court of Session overturned the decisions of the FTT and Upper Tribunal and remitted the case to be heard by a differently constituted First-tier Tribunal: [2020] CSIH 14; [2020] STC 1112; 2020 SC 351. The question on the appeal brought to this court by HMRC is whether the Inner House was right to hold that the tribunals below had erred. We were told that there are many similar claims by other NHS Health Boards and NHS Trusts pending before the tax chamber of the FTT throughout the UK, with a combined value in the region of £38 million.

2. The EU and domestic provisions
(a) The apportionment of input tax

The parties' submissions focused on the provisions of the Principal VAT Directive, that is Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (“the PVD”), and on the Value Added Tax Act 1994 (“ VATA”) although the claim period spans years when predecessor enactments were in force.


Article 1(2) PVD explains that VAT is a general tax on consumption exactly proportional to the price of the goods and services:

“On each transaction, VAT, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of VAT borne directly by the various cost components.”


VAT is chargeable on the activities of a taxable person, defined in article 9 PVD as any person who independently carries out in any place any economic activity, whatever the purpose or results of that activity.


The domestic provision imposing the charge to VAT is section 4 VATA:

“4 (1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.”


The term “any business” used there has the same meaning as the term “any economic activity” used in article 9 PVD.


The tax that can be deducted is specified in article 168 PVD:

“In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:

(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person; …”


The PVD recognises that taxable persons may carry out both economic and non-economic activity. In such a case, the input tax must be apportioned in accordance with articles 173 and 174:

“ Article 173

1. In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.

The deductible proportion shall be determined, in accordance with Articles 174 and 175, for all the transactions carried out by the taxable person.

2. Member States may take the following measures:

(a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;

(b) require the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;

(c) authorise or require the taxable person to make the deduction on the basis of the use made of all or part of the goods and services;

(d) authorise or require the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph of paragraph 1, in respect of all goods and services used for all transactions referred to therein;

(e) provide that, where the VAT which is not deductible by the taxable person is insignificant, it is to be treated as nil.

Article 174

1. The deductible proportion shall be made up of a fraction comprising the following amounts:

(a) as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;

(b) as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.

Member States may include in the denominator the amount of subsidies, other than those directly linked to the price of supplies of goods or services referred to in Article 73.


The domestic provision in the VATA implementing the apportionment articles of the PVD is section 24. This defines “input tax” in relation to a taxable person as including VAT on the supply to him of any goods or services, being “goods or services used or to be used for the purpose of any business carried on or to be carried on by him”.


Section 24(5) provides for the apportionment of input VAT between the business activity and non-business activity carried out by the taxable person:

“Where goods or services supplied to a taxable person […] are used or to be used partly for the purposes of a business carried on or to be carried on by him and partly for other purposes —

(a) VAT on supplies … shall be apportioned so that so much as is referable to the taxable person's business purposes is counted as that person's input tax, and

(b) the remainder of that VAT (“the non-business VAT”) shall count as that person's input tax only to the extent (if any) provided for by regulations under subsection (6)(e).”

(b) Exercising the right to deduct input tax

Chapter 4 of Title X of the PVD deals with rules governing the exercise of the right of deduction. Article 178 provides that in order to exercise the right of deduction a taxable person must meet the conditions set out there. The first condition is that for the purposes of deductions pursuant to article 168(a), that is to say, input tax on supplies to him of taxable goods and services, the taxable person must hold an invoice drawn up in accordance with sections 3 to 6 of Chapter 3 of Title XI. Those requirements about the form and content of VAT invoices are set out in articles 220 onwards. Article 220 provides that every taxable person shall ensure that an invoice is issued in respect of the supply of goods or services he has made to another taxable person. Article 226 prescribes the content of...

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