Inner House remits NHS trust’s historic VAT case to First-tier Tribunal

An NHS trust that applied to recover overpaid VAT has successfully appealed against the decision to reject its case by the Upper Tribunal, with the Inner House remitting the case to the First-tier Tribunal for reconsideration.

The NHS Lothian Health Board operated a number of scientific laboratories from 1974 to 1997 which, in addition to performing NHS work, also carried out business activities for VAT purposes for which it did not reclaim input tax.

The appeal was heard by the Lord President, Lord Carloway, sitting with Lord Drummond Young and Lord Glennie.

Business activities

The appellant operated 44 scientific laboratories from 1974 to 1997 which performed clinical work for the NHS. They also carried out non-patient tests, work for the National External Quality Assessment Scheme, food and water testing, and a number of drug trials. This work was performed for local authorities, pharmaceutical companies and other parties, and was considered business activity for VAT purposes.

The claim was made in light of the House of Lords’ decision in Fleming and Condé Nast v HMRC and the subsequent enactment of section 121 of the Finance Act 2008. The amount claimed for from HMRC was £929,874.69. This claim was initially rejected, and the appellant appealed to the First-tier Tribunal, which rejected the appeal. After a subsequent rejection by the Upper Tribunal, the case reached the Court of Session.

During the First-tier Tribunal appeal, four scientists who worked for the appellant at the time in question and two accountants who could speak to their financial management gave evidence. On appeal to the Upper Tribunal, the appellant criticised the FtT’s reasoning that this evidence was inadequate, as it was the best evidence available to them. It also argued that a reasonable methodology for calculating the payment had been suggested, citing the EU law principle of effectiveness.

The suggested methodology was based on an earlier successful claim to recover input tax from the tax year 2006/7, which had been agreed between the appellants and HMRC as 14.7% of the costs of the laboratories for that year. The appellant sought to extrapolate that percentage backwards in order to claim the deduction for the years in question.

Issue of quantification

The opinion of the court was delivered by Lord Drummond Young. After giving an overview of the relevant national and EU law, he outlined the significance of the findings in fact, saying: “In the first place, they establish that throughout the period of the taxpayer’s claim the taxpayer and its predecessors carried out business activities which were subject to VAT and in respect of which input VAT was deductible. That inevitably means that the taxpayer has a valid Fleming claim for input VAT that was not recovered. The question at issue in the present proceedings is accordingly not the existence of such a claim but its quantification.”

Addressing the FtT’s comments about the lack of primary evidence presented by the appellant, he said: “[I]t appears from a letter sent by HMRC to the taxpayer’s representatives on 21 April 2015 that records held by HMRC for the period before 1997 were destroyed; in 2010 all documents older than six years were disposed of. Thus the state has to bear a major degree of responsibility for the absence of accounting records.”

Turning to the issue of how the claim was to be quantified, he said: “In the present case it was plainly impossible to establish the actual amount of the claim. Consequently the question came to be whether the taxpayer could establish its claim on the balance of probabilities by reference to secondary evidence and inferences drawn from such evidence. In addressing that question, the taxpayer relied on such evidence as was available, making assumptions about the continuity of its business operations over the period of the claim. The question of reasonableness goes to the nature of the secondary evidence that was available, the reasonableness of the assumptions made about that evidence, and the cogency of the inferences drawn from that evidence to establish the final figures relied on by the taxpayer. The problem with the approach by the First-tier Tribunal […] is that it relies fundamentally on the absence of primary evidence, and does not address the main issues in the taxpayer’s argument, namely the inevitable reliance on secondary evidence and inferences drawn from that evidence.”

He continued: “The fundamental point here appears to be that without primary records such as invoices or ledgers it is impossible to verify a claim, and if the claim extends over a period such documentation must be available at regular intervals, possibly every five years. Once again this fails to address the fundamental problem that, largely as a result of matters for which the United Kingdom government was responsible, such primary evidence did not exist for the claim period. What was material, therefore, was whether the taxpayer’s alternative methodology was sufficient to quantify its claim on a balance of probabilities test. That question is not addressed.”

Concluding, Lord Drummond Young said: “The critical question is accordingly 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. The secondary evidence includes the quantification of the claim that the taxpayer has produced, and also the testimony of the witnesses who gave 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. That question has not in our opinion been properly addressed by the First-tier Tribunal.”

Allowing the appeal, he said: “We consider that the appropriate procedure thereafter is to set aside the decisions of the First-tier and Upper Tribunals and to remit the case to a differently constituted First-tier Tribunal for reconsideration. Extensive evidence has been led, and it may well be possible for the Tribunal to make use of that evidence in coming to a decision on the case. We would not, however, seek to dictate the procedure that should be followed in this respect; details of procedure are generally best left to the court or tribunal that requires to carry them out. The fundamental task for the First-tier Tribunal is to reconsider the claim presented by the taxpayer and the arguments for both parties. In doing so it should obviously have regard to the considerations that we have set out in the earlier parts of this opinion.”