The Court of Session demonstrated how to exercise judgement in a reclaim stretching back years where records have been lost or destroyed
Jan Garioch CA discusses a recent case, NHS Lothian Health Board v HMRC, which saw the Court of Session refuse to see an evident entitlement to recover input VAT fail because of the difficulty in providing evidence in support.
A claim for unrecovered VAT attributable to taxable supplies
The Court of Session hearing was the third bite of the cherry for Lothian Health Board (LHB) in its quest to reclaim input VAT attributable to the element of its supplies going back to 1974 which were taxable. Most of LHB’s activities are non-business activities but it and its predecessors had some taxable supplies from laboratories carrying out some work outside the NHS, performing services for local authorities and pharmaceutical companies. No claim had been made for input VAT incurred to make taxable supplies until the issue of “Fleming claims” arrived on the scene.
Following the House of Lords judgement in 2008 on the Fleming case, claims for recovery of input VAT incurred before 1 May 1997 could be made without any time limit provided that the claim was made before 1 April 2009. LHB submitted claims going back to 1974 but HMRC refused the claims because of the difficulty in providing supporting evidence.
The Court’s judgement on how to tackle a historical claim
Despite the fact that LHB had lost at both FTT and Upper Tribunal, the Court had little difficulty in overturning that and reaching a decision in its favour. The Court’s bird’s eye view of the case was that a right to repayment exists, and indeed was agreed by all parties from the outset. Therefore, the Court set out the fundamental question to be answered as “whether, in general terms, the taxpayer’s calculation is more likely to be correct than the counter argument for HRMC that no or significantly less input tax is due to be repaid”.
The Court acknowledged that there were deficiencies in the evidence but it homed in on where the responsibility for that lay. They found that absence of evidence related firstly to it being a historical claim which could not have been brought earlier because of deficiencies in UK legislation and secondly to government practices regarding input tax claims by public authorities. For a significant period, the Scottish Office handled VAT reporting for NHS boards and it was not its practice to make claims to recover VAT on business activities.
Consequently, the Court found that difficulties of proof were not sufficient reason to reject the possibility of quantification. With a starting point that the appellant was entitled to some repayment and was not itself responsible for the difficulty in providing proof, the Court held that the case had to be referred back to a differently constituted FTT which must identify a satisfactory methodology to permit quantification.
What had gone wrong before the case reached the Court of Session?
It was the responsibility of the FTT to establish on the balance of probabilities (the ordinary civil standard of proof) whether the appellant’s calculation could be upheld. The Court found the FTT made heavy weather of that task because it wanted to be presented with arithmetical calculations based on financial records so that it could make its decision with something approaching certainty.
What they were presented with instead was a request to extrapolate backwards from the agreement which the appellant and HMRC reached on calculations for the year 2006/2007. LHB put forward witnesses to substantiate that the activities of the laboratories did not change during the period of the claims and argued it was reasonable to infer that the nature of the inputs would not have changed markedly throughout that period.
The FTT demanded much greater certainty, stating it wanted “to have a verifiable percentage, calculated by reference to prime records at regular intervals, and suggested that for a 25-year period it was looking to have verifiable figures every five years”. Subsequently, the Upper Tribunal also found that LHB’s extrapolation method was not a sufficiently precise or satisfactory basis for a claim. Both Tribunals failed to exercise the judgement that the Court found to be required. The correct approach should have been to weigh up the strength of the evidence available, the reason for absence of other evidence and the coherence of the reasoning that was being claimed to support the inferred amount of input tax recoverable.
Back to FTT with a direction to adequately address the secondary evidence
The Court commented that there could have been circumstances where its approach would have differed. If it had found that the appellant had not kept proper records, or had destroyed them prematurely, it could envisage finding that the taxpayer had failed to make a reclaim calculation on a sound basis. It had sympathy with the concept that the Tribunal did not function as a detective with a duty to fix a figure regardless of the quality of evidence.
However, in this case the FTT took the wrong approach in relying fundamentally on the absence of primary evidence and failing to adequately address secondary evidence that could establish the reasonableness of the claim. The Court despatched this case back to a differently constituted FTT with the cheery hope that “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”.