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Court urges 'flexible approach' to historic UK VAT relief cases

Out-Law News | 16 Apr 2020 | 4:48 pm | 4 min. read

UK tax tribunals and HM Revenue & Customs (HMRC) "should adopt a flexible approach to the burden and standard of proof" in claims for historical VAT repayment, the Court of Session has said, in a case involving NHS Lothian's claims for repayment of VAT dating back as far as 1974.

"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," said Lord Drummond Young giving the opinion of the Court of Session, the Scottish equivalent of the Court of Appeal.

“The judgment of the Court of Session will be welcomed by taxpayers who have unresolved historical claims," said Clara Boyd, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.

"It will be reassuring for those companies who have submitted claims for overpaid or under-claimed VAT that, if the underlying right to recovery is established, then they should not be denied payment solely due to the absence of primary evidence to assist with quantification of the claim," she said.

Boyd Clara

Clara Boyd


The very helpful guidance provided by the court is grounded in pragmatism and common-sense.

The case concerned NHS Lothian Health Board which was claiming the repayment of over £900,000 of VAT input tax for the period from 1974 to 1997. It operated scientific laboratories which were used mainly for the NHS, but partly for local authorities and pharmaceutical companies. The non-NHS work amounted to a business activity for VAT purposes, but input tax attributable to this business activity was not reclaimed by the heath board, as was the general practice at that time.

Between 1974 and 1989 there was no provision in UK law that gave any right to recover past overpayments of VAT. In 1997 the right to make a claim for unrecovered input tax was introduced, but it was subject to a limitation period of three years which was retrospective and there were no transitional provisions for historical claims.

In 2002, in a case involving retailer Marks & Spencer, the European Court of Justice held that the lack of any transitional provision for recovery of overpaid output tax was incompatible with EU law. In a subsequent case involving a company called Fleming the House of Lords applied a similar approach to claims for unrecovered input tax saying that transitional provisions had to be made to allow historical claims to proceed.

After that case UK legislation was amended so that claims for recovery of input tax incurred in accounting periods ending before 1 May 1997 could be made without any time limit provided that the claim was made before 1 April 2009. These are known as 'Fleming claims'.

As in this case, the fundamental problem in most Fleming claims is the availability of documentary evidence to support the claim. Financial records may have been destroyed or misplaced by both the taxpayer and HMRC, making proof of a claim difficult or impossible.

In this case, the records for the relevant years had been destroyed. The recoverable amount of input tax for 2006-07 could be determined and had been agreed with HMRC at 14.7%. HMRC rejected the health board's use of the same percentage for the earlier years on the basis that there was insufficient evidence that it was correct. The First-tier Tribunal (FTT) heard witness evidence from scientists and accountants who had worked for the health board in the relevant period and accepted that the nature of the health board's work did not change over the period in question. However, the FTT did not consider it was reasonable to use the 14.7% percentage for years as far back as 1973, without any supporting documentary evidence. 

The Court of Session agreed with the Lothian Health Board that the right to repayment of overpaid VAT guaranteed by EU law and the 'principle of effectiveness', meant that even if the taxpayer’s methodology for calculating the amount of repayment was rejected, HMRC, and the Tribunals, should not reject completely the taxpayer’s claim for repayment of input VAT solely on the basis of difficulties with identifying a satisfactory methodology or difficulties of proof.

The principle of effectiveness, set out in the EU case of San Giorgio, is that if a legal right exists, a remedy should be available to secure the practical availability of that right and any requirements of proof must not make it excessively difficult to enforce the right.

"In our opinion the principle is not confined to what may be described as legal rules relating to matters such as the availability of evidence or the burden of proof. It also extends to the practical attitude taken by a court or tribunal to the evidence led in a particular case. That applies in particular to the willingness of the court or tribunal to draw inferences from such primary evidence as is available; if too strict an approach is taken to the ability to draw inferences, it may well be 'excessively difficult' (or even 'practically impossible') to establish a claim," the judges said.

"The critical question is … whether, in the light of the absence of primary evidence, the taxpayer has succeeded in proving the quantification of its claim on the balance of probabilities by using such secondary evidence as exists and drawing inferences from that evidence. …. This is not a test of certainty or near certainty: the critical question is whether the taxpayer’s calculation of the amount due is more likely to amount to a proper quantification of its claim than the alternative, which appears to be that no input tax is repayable because of the impossibility of quantification," the court said.

The judges said that an important factor in this case was that the reason why the health board had not made a claim previously or kept records that would have supported a claim was because UK legislation prevented claims, notwithstanding the existence of the right to recover input tax in EU law.

"In a case where it is clear that some repayment of tax is due by HMRC, it should normally be possible to reach some sort of quantification of the amount due. Indeed, it can be said that exceptional circumstances would be required to render such quantification impossible. If necessary the tribunal should perform the appropriate calculations itself, or at least state the principles by reference to which it is thought that the calculation should be made," the Court of Session said.

"The very helpful guidance provided by the court on how the tribunals should deal with historical claims, endorsing a 'flexible approach', is grounded in pragmatism and common-sense so as to ensure taxpayers are granted an effective remedy, where appropriate,” Clara Boyd said.