NHS Lothian Health Board v R & C Commissioners
| Jurisdiction | Scotland |
| Judgment Date | 09 April 2020 |
| Neutral Citation | [2020] CSIH 14 |
| Court | Court of Session (Inner House) |
[2020] CSIH 14
Lord President, Lord Drummond Young, Lord Glennie
Court of Session (Inner House, First Division)
Value added tax – Fleming (t/a Bodycraft) v R & C Commrs [2008] BVC 221 claim for underclaimed input tax – Whether calculations satisfactorily quantified claim on balance of probabilities – Claim rejected by HMRC and rejection upheld by FTT and UT – Whether lower courts rulings consistent with EU principle of effectiveness – No – Claim remitted back to FTT for further findings of fact.
The Court of Session remitted a Fleming claim for underclaimed input tax back to the FTT for further findings of fact. It was agreed that the appellant had underclaimed input tax in the period 1973–1997. HMRC rejected the claim on the basis that it was not calculated to a sufficient degree of accuracy and the FTT and UT agreed. The Court of Session considered that the lower courts' rulings were not compatible with the EU principle of effectiveness and remitted the case back to the FTT with guidance on the principles to apply.
NHS Lothian Health Board (“Lothian”) submitted a so-called Fleming claim for input tax which was underclaimed in the period 1974–1997. The claim had been calculated at ~£1m. It was agreed that Lothian had underclaimed input tax but there was disagreement with HMRC regarding whether it could be quantified with sufficient accuracy.
The claim arose in relation to laboratories operated by Lothian (and its predecessors). The laboratories undertook non-business activities (clinical tests for Lothian) and business activities (e.g. tests for clinical trials). The business activities were subject to output tax and gave rise to an entitlement to recover input tax but, due to a policy decision made by the Health Service, the input tax was not claimed at the time.
Due to the passage of time, Lothian did not have complete historic records so it calculated its claim by extrapolating back from current input tax entitlement. The FTT heard evidence that the laboratories' activities had not materially changed over time.
The FTT and the UT both agreed that this extrapolation exercise was not sufficiently precise and did not provide a satisfactory basis on which to calculate the claim.
The Court of Session agreed with the appellant that the FTT and UT had erred in law. In particular the FTT and UT's decisions did not comply with the EU principle of effectiveness (e.g para. 34), i.e the principle that “any requirement of proof which has the effect of making it virtually impossible or excessively difficult to secure the repayment of charges levied contrary to Community law would be incompatible with Community law” (see para. 17).
The FTT rejected the claim because Lothian could not confirm how much output tax had been accounted for on the business income of the laboratories. In its view, this made it difficult to assess the reasonableness of the input tax claim. The Court of Session considered that this was “too high a test” (para. 55).
The case was remitted back to a differently constituted FTT which should make the findings of fact needed to satisfactorily calculate Lothian's claim. In re-making the decision the FTT should apply the following three principles (paras. 47–49):
- It should confine itself to the specific dispute before it;
- The onus of proof is on the taxpayer and the standard is the balance of probabilities. The FTT can hold that a claim fails for one of two reasons i) it is not satisfied on the balance of probabilities that input tax had been underclaimed or ii) although it is satisfied that input tax was underclaimed it is unable to ascertain that any particular, or even a minimum, amount of input tax was underclaimed;
- The FTT is not confined to the arguments put to it by the taxpayer and HMRC, it is open to the FTT to adopt its own preferred solution.
The Court expanded on the approach to be taken by the FTT in making its findings of fact (i.e determining the way in which Lothian's VAT claim should be calculated) and concluded “We consider that the Tribunals and HMRC should adopt a flexible approach to the burden and standard of proof in connection with historical claims for repayment. The fundamental problem in such cases is that primary evidence does not exist owing to the lapse of time. The absence of such evidence, at least in cases such as the present, is not the fault of the taxpayer, and the lack of evidence should not be held against the taxpayer” (para. 66).
Finally, when making its decision the FTT had applied reasoning based on partial exemption, not business:non-business apportionment. The UT and Court of Session agreed with Lothian that this was incorrect but concluded that, because this faulty reasoning was not a direct contributor to its decision, the FTT's decision should not be overturned on this basis.
The decision provides a useful overview of the EU principles to apply when considering the evidence which must be provided when a taxpayer makes a historic claim. However, this case is unlikely to have significant wider impact as the deadline for submitting Fleming claims for historic VAT overpayments (31 March 2009) expired many years ago.
For commentary on the capping of historic VAT claims, see the Indirect Tax Reporter at
Appellant: Edwards; Clyde & Co (Scotland) LLP
Respondent: DM Thomson QC, Roxburgh; Office of the Advocate General
[1] The decision of the House of Lords in Fleming (t/a Bodycraft) v R & C Commrs [2008] BVC 221, and the consequential enactment of section 121 of the Finance Act 2008 have given rise to a significant number of claims for overpaid value added tax of a historical nature. The present case involves such a claim. As in many such cases, the primary issue is not the existence of the taxpayer's claim to recover overpaid value added tax but the quantification of that claim, and in particular whether the claim can be quantified with sufficient accuracy to permit an order for repayment of tax to be made.
[2] The taxpayer is a National Health Service trust responsible for the provision of health services within the Lothian area, and is the successor to health boards that provided similar services within the same area. The taxpayer and its predecessors operated 44 scientific laboratories during the period between 1974 and 1997. Most of the work performed in the laboratories was carried out for the clinical purposes of the taxpayer and its predecessors. To that extent the work of the laboratories consisted of non-business activities for value added tax purposes. Nevertheless, the laboratories carried out work for persons outside the NHS, including local authorities and pharmaceutical companies. For value added tax purposes such work amounted to business activities. The Upper Tribunal records that such work included non-patient tests, work for the National External Quality Assessment Scheme (NEQAS), drug trials and food and water testing. It is agreed that the input tax paid by the taxpayer and its predecessors between 1974 and 1997 in respect of laboratory expenditure for such business activities was not reclaimed by the taxpayer or by any government body acting on its behalf.
[3] The taxpayer now seeks to recover such input tax. It has made a global Fleming claim for the whole period from 1 April 1974 to 30 April 1997 which covers, inter alia, the activities of its laboratories. The claim in respect of the laboratories has been reduced from its original level, and is now for £929,874.69 of what is alleged to be recoverable input tax. That claim was rejected by HMRC, and the taxpayer appealed to the First-tier Tribunal. The First-tier Tribunal heard from a number of witnesses who gave evidence on behalf of both the taxpayer and HMRC. These included four scientists who had been employed in the taxpayer's laboratories between 1974 and 1997 and two accountants who gave evidence relating to the taxpayer's financial management. The First-tier Tribunal rejected the taxpayer's appeal on 26 June 2017. That was followed by an appeal to the Upper Tribunal, which rejected the appeal on 2 July 2018. The taxpayer has now appealed to the Court of Session against that decision.
[4] The principal argument presented to the Upper Tribunal was that the First-tier Tribunal had erroneously adopted an approach based on partial exemption instead of apportionment between business and non-business activities. The Upper Tribunal rejected that argument on an analysis of the First-tier Tribunal's reasoning. We should record at this stage that on this matter we are in full agreement with the reasoning of the Upper Tribunal. In the argument before the court, however, the taxpayer's principal criticism was directed at the First-tier Tribunal's decision to refuse the taxpayer's claim in its entirety on the basis that the evidence available was inadequate to permit proper calculation of the claim; the evidence produced, it was contended, was the best that was available, and a reasonable methodology was suggested for calculating the amount of the historical overpayments. In support of that argument the taxpayer relied on the EU law principle of effectiveness.
[5] In our opinion the argument based on the adequacy of the available evidence is well founded, for reasons that we will discuss. In order to place that argument in context, however, it is necessary for us first to discuss the scheme of value added tax, and in particular the right to deduct input tax in cases where the taxpayer carries out both business and non-business activities; secondly, to describe the history of the right of a taxpayer to recover overpaid value added tax as a matter of both EU and UK law, and in so doing to set out the present state of that right; thirdly, to set out the historical background to the activities of the taxpayer and its predecessors; and fourthly, to describe briefly the EU law principles of effectiveness, certainty...
To continue reading
Request your trial
-
NHS Lothian Health Board v Revenue and Customs Commissioners
...[2022] UKSC 28 before Lord Reed, President Lord Briggs Lord Sales Lord Leggatt Lady Rose Supreme Court Michaelmas Term On appeal from: [2020] CSIH 14 Appellant David Thomson KC Ross Anderson (Instructed by Advocate General (Scotland)) Respondent David Southern KC Denis Edwards (Instructed b......
-
Pye Motors Ltd
...that evidence. [22] I was also referred to the decision of the Court of Session (Inner House) in NHS Lothian Health Board v R & C Commrs[2020] BVC 6. At the time of the hearing that case was on appeal to the Supreme Court. It concerned the correct approach to the burden and standard of proo......