Health board failed to prove input VAT recovery claim
A Scottish health board had failed to establish the proportion of work carried out by its scientific labs over a period of years that was external private work for which input VAT incurred was recoverable, and the Inner House of the Court of Session misinterpreted a key aspect of findings made by the First-tier Tribunal in holding to the contrary, the UK Supreme Court has ruled.
In a unanimous decision, Lord Reed, Lord Briggs, Lord Sales, Lord Leggatt and Lady Rose allowed an appeal by HM Revenue & Customs from the Inner House ruling that the private work proportion of 14.7% derived by NHS Lothian Health Board from its labs’ activity for the year 2006-07 could be applied to the years from 1974 to 1997 for which the health board claimed unrecovered input tax.
The labs’ main work was providing clinical services to the NHS, a non-business activity in respect of which any input VAT incurred on this type of work was not recoverable. However, they also undertook some external private work, a business activity in respect of which input tax incurred was recoverable. NHS Lothian did not have sufficient records for the years in question to show how much input VAT had been paid for the work done in the labs, or the split of that work between business and non-business activity.
Its claim using business activity for the year 2006-07 as a baseline was rejected by HMRC on the ground that it had not established that this method of valuation by extrapolation was reasonable. On appeal the First-tier Tribunal, after hearing evidence, dismissed the appeal. The Upper Tribunal affirmed this decision but the Inner House allowed NHS Lothian’s appeal.
Ruling for HMRC in the Supreme Court, Lady Rose, with whom the other Justices agreed, said that contrary to the Inner House’s view, the First-tier Tribunal had not found that the proportions of NHS Lothian’s business and non-business activities were essentially the same across the claim period. Rather, the FTT’s finding was that there was not enough evidence to establish what that proportion was, whether it had changed over the years covered by the claim period or as between the end of the claim period and the year 2006-07.
She added that the Inner House was wrong to treat the right to deduct some input tax as independent of the obligation on the taxpayer to quantify properly the amount of tax it could recover. It was not enough for a taxpayer to show that it had incurred some input tax for the purposes of its business activity: proof of the amount incurred was a substantive precondition for the exercise of the right to deduct that or any amount. While the UK allowed a taxpayer to prove this evidence other than the VAT invoices from suppliers showing input VAT paid, the taxpayer had to present a credible method for estimating the amount of the claim with reasonable certainty.
Lady Rose observed that “both HMRC and the FTT rightly required that there be some way of establishing that the key ratio during the claim period was likely to have been the same as it was in the more recent year for which it was possible to calculate that ratio. It was this step that NHS Lothian was unable to take, either on the basis of documentary evidence or on the basis of oral evidence from those who worked in the laboratories over the period”.
The EU principle of effectiveness, relied on by the health board, did not require the ordinary rules on evidence and the burden and standard of proof to be departed from if the taxpayer could not comply with those rules. The standard of proof applied to its claim was the balance of probabilities which applied in the same way to all historic tax claims, and the principle of effectiveness was not infringed in this case. HMRC’s and the FTT’s approach did not make NHS Lothian’s claim virtually impossible or excessively difficult to enforce.