Lack of evidence signals the failure of historic VAT claim

Handing down their decision in HM Revenue and Customs (HMRC) v NHS Lothian (36 pages / 390KB PDF), the Supreme Court judges confirmed rulings by the First and Upper Tribunals that found the Scottish health board had failed to adequately quantify its VAT input tax recovery claims. They concluded that NHS Lothian did not have sufficient evidence to support its ‘Fleming’ claim for under-recovered input tax.

Jake Landman of Pinsent Masons said: “The Supreme Court records that there are many similar claims that have been stayed behind this one, amounting to approximately £38 million. It remains to be seen whether the decision reached in this case is sufficient to dispose of those claims, or whether other claimants conclude that the evidence they have for their claims is better able to meet the requirements now established.”

The dispute centred around some of the supplies made by the health board over the course of more than 20 years. Most of the supplies made by NHS Lothian were non-business activities because they were made to the NHS, meaning that no input tax was recovered in respect of those supplies. However, a small proportion of its supplies between 1974 and 1997 were business supplies on which Lothian did not reclaim the input tax.

Landman said: “This was in accordance with general practice at the time, but when the law was clarified it became clear that Lothian should have been recovering that input VAT. The issue throughout these proceedings was whether it is possible to calculate the amount of that claim with sufficient certainty to permit recovery.”

The First and Upper Tribunals had both found that Lothian could not make the recovery. However, the Inner House of the Court of Session had reversed those decisions, remitting the case to the First-Tier Tribunal (FTT) for a re-hearing. It also gave guidance on how the tribunal should approach the quantification of historic claims.

When hearing HMRC’s appeal, the Supreme Court considered what Lothian had to do in order to justify its claim. It confirmed that the taxpayer must either present the specified documents – usually invoices – or provide a credible alternative method by which the amount could be estimated by HMRC with reasonable certainty.

Landman said: “The Supreme Court found that it is not sufficient for a taxpayer simply to show that some input tax had been incurred on business activities in order for HMRC to be forced to accept the claim unless it can show that there were no business activities at all or no input tax paid at all. Put succinctly, the taxpayer’s obligation is to prove how much it is entitled to claim.”

The Supreme Court also found that there was nothing in the approach of HMRC or the FTT that showed Lothian’s claim was virtually impossible or excessively difficult, confirming that the principle of effectiveness under EU law has not been infringed. Landman said that the Supreme Court’s statements on this question were the most significant because they confirmed that it is “not the job of the tribunal to conduct a proportionality exercise”.

He added: “The Lord Justices held that the FTT had been correct to ‘decline the role of forensic accountant on behalf of NHS Lothian’. The explanation of the consequences of that position – that the FTT is not bound to conclude either the taxpayer’s position or HMRC’s position but is entitled to reach a point in between based on the evidence in front of it – will be useful for many others taking their appeals to the tribunal.”

The Supreme Court also considered whether the conduct of the state – other than in the setting of procedural conditions for the exercise of a right – can constitute an infringement of the principle of effectiveness. Although it found the question “interesting”, the Supreme Court concluded that the question did not arise on the facts of this case because the state had not taken any such conduct. The Supreme Court confirmed that it is not the responsibility of HMRC to keep taxpayer records on the off chance that a taxpayer later seeks to make a claim. It also confirmed that there was no error of law in the FTT’s reasoning.