TC03397: NHS Lothian Health Board

JurisdictionUK Non-devolved
Judgment Date14 March 2014
Neutral Citation[2014] UKFTT 258 (TC)
Date14 March 2014
CourtFirst-tier Tribunal (Tax Chamber)
NHS Lothian Health Board

Judge Kenneth Mure, QC, Mr S A Rae, LLB, WS, Mr P R Sheppard, FCIS, FCIB, CTA

[2014] UKFTT 258 (TC)

Value Added Tax - Capital expenditure - Recovery of residual input tax - VATA 1994, section 25ss. 25, 26 - Fleming rule FA 2008, section 121s. 121- VAT Regulations 1995, regs. 101, 102 - Principles of quantification - Onus and standard of proof - Appeal refused.

The First-tier Tribunal (FTT) dismissed the appeal by the appellant Heath Board against HMRC's decision to reject its late claim for input tax paid on capital expenditure.


The appellant provides a public service, which generally is "outside the scope" of VAT being a non-business activity. However, some of its activities are of a business nature, e.g. catering for persons other than hospital patients and for which a charge is made.

The appellant belatedly reclaimed input tax paid on capital expenditure referable to taxable (standard and zero-rated) supplies for the period from 1974 to 1997. The appellant's income from private patients was small and was treated as exempt.

At para. 54 of its decision, the FTT held that the onus is on the appellant to show, on the balance of probabilities, that the calculation was of a reasonably precise figure for VAT that has been incurred and that has not already been reclaimed. The FTT tried to assist the parties to devise a "fair and reasonable" formula to calculate how much input tax is recoverable as relating to business supplies and allocating it between exempt and taxable supplies. However, as explained below, there were too many imponderable factors that stopped the FTT from devising such a formula, so the appeal was dismissed.

Because of a dearth of records held by the appellant, the claim was based on inputs, with costs taken from the annual accounts. There were three steps. First, the residual VAT on capital expenditure was calculated. Second, a taxable business percentage was ascertained, using inputs. Third, that percentage of the amount of the residual VAT was claimed. Allowance was made for certain VAT on professional fees. VAT attributable to dwellings, being exempt expenditure, was excluded. Allowance was made in respect of VAT recovered on works done under the Contracted Out Scheme (COS).

The FTT did not hear any satisfactory evidence as to the manner and practice of their compilation and the crucial aspect of the inclusion or exclusion of VAT in the figures and any interim recovery of VAT under COS. Also, the late claim was complicated because all the NHS bodies in Scotland had one VAT registration until April 1994, so one consolidated VAT return had been submitted.

The VAT treatment of construction and maintenance of buildings changed during the period of the claim. In particular, land transactions were generally exempt from VAT until 1989. As the nature of works undertaken was unclear, it was uncertain whether VAT had been incurred.

Also, the calculations failed to take account of the requirements of the Capital Goods Scheme.

Bookkeeping practices were far from ideal as regards identifying whether expenditure was recorded as VAT-inclusive or VAT-exclusive, and in recording any occasional recoveries of input tax.

To be recoverable, input tax must be attributable to business supplies, rather than non-business supplies, and the business supplies must be taxable, rather than exempt. Where there remains a balance of input VAT partly attributable to taxable and exempt supplies, a method must be devised to produce a "fair and reasonable" attribution.


This is the second of the related Scottish Health Board appeals concerning late VAT claims, see also NHS Dumfries and Galloway Health BoardTAX[2014] TC 03381. Without supporting records, a late claim is always likely to fail.

For the Appellant, David Southern, Barrister;

For the Respondents, Sean Smith, QC and Ian Mowat, Solicitor, Office of the Advocate General for Scotland


[1]This is the second of the related Scottish Health Board appeals. It is at the instance of NHS Lothian Health Board and relates to the recovery of input tax paid on capital expenditure over a 23 year period from 1974 to 1997.

[2]Substantially the appellant provides a public service, outwith the VAT system as being non-business in nature. However, a small element of its and other Health Board's activities are of a business nature and within VAT. For instance, catering for persons other than hospital patients and for which charges are made, is a standard rated supply. This appeal relates to the recoverable input tax on capital expenditure referable to taxable (standard and zero rated) supplies.

[3]This is a Fleming-type claim, proceeding on the basis of section 121Section 121 FA 2008. In his introductory remarks Mr Southern acknowledged that he had to demonstrate that the VAT which the appellant now sought to recover had in fact been paid earlier, and that it has not been reclaimed or recovered to date. A complication arose under the Contracted-out Services ("COS") scheme: where VAT had been recovered in relation to that earlier, it had to be allowed for in the claim, to avoid any duplication of recovery. Finally, and most problematical, is the devising of a "fair and reasonable" formula to calculate how much input tax paid is recoverable as relating to business supplies. Thereafter this has to be allocated between exempt and taxable supplies.

The Law

[4]A common Bundle of Authorities was prepared for this and the other related Health Board VAT appeals. These are listed in the Appendix hereto together with certain other authorities referred to.


[5]In addition to voluminous documentation both parties led evidence from their respective technical specialists, Mr Muir for the appellant and Miss Langley for HMRC. However, Mr Southern prefaced this by leading evidence of matters of fact from four Health Board employees. All of the witnesses read and confirmed the terms of their Witness Statements.

[6]Firstly, Robert Martin gave evidence. He is currently head of Corporate Reporting & Governance with the appellant. He has over 20 years' experience of financial accounting and management in the NHS in Scotland. He explained that until April 1994 there had been one collective VAT registration for the Scottish Health Boards. Thereafter financial matters within the NHS had been devolved to directly managed Trusts, each with its own VAT registration. He observed by reference to the documentation that the Trusts were not regularly reclaiming monthly input tax. He confirmed that the appellant's income from private patients was very minute and fell to be treated as exempt.

[7]Mr Martin explained that where an NHS body bore the cost of VAT, the practice was to record it inclusive of VAT. Where VAT was attributable to a particular outlay and was recovered, expenditure was shown net of VAT. VAT was not recovered where it was only indirectly attributable to an asset. Mr Martin confirmed this throughout cross-examination. He spoke to the appellant's growing awareness latterly of its right to recover residual input tax.

[8]Secondly, Michael Shiels gave evidence. He is assistant head of Financial Services at NHS Greater Glasgow & Clyde. He has worked in NHS finance for about 20 years, although not for the appellant. He confirmed the practice that where VAT was attributable to a particular asset and taxable supply, it would be recovered. Where this was not possible, the "default" position was that it was treated as irrecoverable. He confirmed too that the supply of services to private patients was minimal and treated as exempt.

[9]Next, Derrick Douglas gave evidence. He is presently assistant Director of Finance with NHS Forth Valley. Since 1993 he has worked for various NHS bodies in Scotland. He works as a capital accountant and would have been involved in VAT recovery in relation to all capital projects. He was familiar with the recovery of VAT on professional services in COS schemes. He had no recollection of recovering VAT under business activities for capital schemes. He was unaware of proportional recovery of VAT. Repairs and maintenance would have been regarded as revenue and not capital expenditure within the NHS.

[10]Mr Douglas indicated that until about 1993 and the structural re-organisation of NHS bodies, the matter of VAT recovery was not pursued methodically. As a general practice VAT on business activities was regularly not recovered.

[11]The final introductory witness as to the nature of the financial "background" was George Curley, a chartered engineer, presently Director of Operations with the appellant, with responsibility for Estates and Facilities. He was involved in the financial aspects of capital developments. So far as he was aware, no VAT recovery had been made in respect of capital schemes, and he too indicated that he was only aware of VAT recovery under the COS regulations in relation to a small element of professional consultancy fees These works had included the provision of kitchen and dining facilities.

[12]We found each of these witnesses credible and reliable. Collectively they tended to confirm as broad propositions the first three Findings-in-Fact suggested by Mr Southern and noted by us at para 33. However, their evidence fell short of supporting the value of the claim or the manner of its calculation. They did not speak to the records relied on by Mr Muir, their compilation or their accuracy, for instance. Their evidence was in very general terms.

[13]Evidence was then taken at length from each of the Parties' technical experts, Ross Muir for the appellant, and Miss Kathleen Langley of HMRC. (They both gave specialist evidence in the related appeal by Dumfries & Galloway Health Board.) Mr Muir is an economics and accountancy graduate, employed by Liaison, a specialist VAT consultancy, and is experienced in advising NHS bodies...

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4 cases
  • NHS Lothian Health Board v Revenue and Customs Commissioners
    • United Kingdom
    • Supreme Court (Scotland)
    • 19 October 2022
    ...claim seeking to recover input tax incurred over the claim period on capital expenditure. That claim was also rejected by the FTT ( [2014] UKFTT 258 (TC)) and by the Upper Tribunal ( [2015] UKUT 264 (TCC), [2015] STC 2221) for similar reasons as were relied on in the decisions in this cas......
  • Greater Glasgow & Clyde Health Board
    • United Kingdom
    • First-tier Tribunal (Tax Chamber)
    • 13 March 2015
    ...of the claim; 2) NHS Dumfries and Galloway Health Board TAX[2014] TC 03381, which concerned catering; and 3) NHS Lothian Health Board TAX[2014] TC 03397, which concerned capital There are those who regret that effectively one part of the government is arguing about a significant amount of t......
  • NHS Lothian Health Board
    • United Kingdom
    • First-tier Tribunal (Tax Chamber)
    • 26 June 2017
    ...records. These, he explained, in the cases of Greater Glasgow & Clyde Health Board TAX[2015] TC 04324 and NHS Lothian Health Board TAX[2014] TC 03397 were archived at respectively the Mitchell Library in Glasgow and in Edinburgh University Library. Also there were the “Blue Books” which rec......
  • Lothian NHS Health Board v Revenue and Customs Commissioners
    • United Kingdom
    • Upper Tribunal (Tax and Chancery Chamber)
    • 28 May 2015
    ...(“FA 2008”), s. 121 – Appeal refused. The Upper Tribunal (UT) upheld a First-tier Tribunal (FTT) decision (NHS Lothian Health Board TAX[2014] TC 03397) that the appellant had failed to prove its Fleming claim, to an acceptable standard, for the repayment of unrecovered input tax that had be......

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