A health board has won the right to reclaim overpayments of value added tax dating from before 1997, if it can establish the amount probably due even though no exact quantification is possible, following an appeal to the Inner House of the Court of Session.
Lord President Carloway, Lord Drummond Young and Lord Glennie allowed an appeal by NHS Lothian Health Board against decisions of the First-tier Tribunal and Upper Tribunal, which had rejected the claim on the basis that the evidence available was inadequate to permit proper calculation of the claim. The judges ruled that where the only issue was quantification of the claim, the taxpayer was entitled to prove on balance of probabilities what amount might be due, especially where the lack of more precise evidence was due to Government actions.
The claim followed the House of Lords decision in Fleming v HMRC (2008), and s 121 of the Finance Act 2008, which allowed such claims. It arose from work carried out between 1974 and 1997 in laboratories operated by the health board and its predecessors for persons outside the NHS. As a matter of Government policy this had not been reclaimed at the time, and financial records from the period had since been destroyed, also through Government policy. An initial higher claim had now been reduced to £929,874.
It was accepted that in 2006-07, 14.7% of the laboratories' work had been for outside persons, and evidence was led from scientists and accountants who could speak to the period that the nature of the laboratories' activities did not change over this time, and that the proportion of outside work had remained fairly constant throughout. The health board sought to extrapolate that percentage backwards to earlier years, which was rejected by HMRC on the basis that the evidence available was insufficiently reliable.
Lord Drummond Young, giving the opinion of the court, noted that about 700 such claims had been made from NHS bodies under s 121, which was enacted to make the law compliant with EU law, and more than 200 of these claims were still unresolved. The EU law principles of effectiveness, certainty and proportionality were relevant in determining the proper approach to the claims.
He added however that while the principle of legal certainty was important in relation to the rules of a legal system, it was "not relevant to the assessment of the evidence, which is a wholly separate – and very important – task for the court".
The effectiveness principle extended 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."
He added: "we think it important to bear in mind that in historical Fleming claims the responsibility for failure to make the claims when full evidence was still available lies in considerable measure with the state... In the case of NHS boards and the trusts that preceded them, there is the further factor that their VAT affairs were at one time under Government control, and at that time, as a matter of policy, no attempt was made to recover input VAT in respect of laboratory activities. All of these are factors that suggest that a reasonably generous approach should be taken to historical claims to recover input tax in cases such as the present.
"Ultimately the exercise involved is one of judgment, weighing up the strength of the evidence that is available, the reasons for the absence of other evidence, and the coherence of the reasoning that is said to support an inference as to the amount of input tax that is recoverable on the basis of the evidence that is available".
Proof was still required on balance of probabilities, but where detailed financial records were lacking, "The tribunal must accordingly proceed on the basis of the evidence that is available, and the critical question for it is whether on the basis of that evidence it is possible to hold that the taxpayer has proved its calculation of unrecovered input tax on a balance of probabilities – in other words, whether the taxpayer’s calculation is, at a general level, more likely than the contention that no unrecovered input tax, or a much lesser amount of such tax, is due...
"So far as deficiencies in the evidence are concerned, it is of course material for the tribunal to consider who is responsible. If the fault is that of the taxpayer, for example through not keeping proper records or destroying records prematurely, it might be legitimate for the tribunal to draw the inference that the taxpayer has failed to make out its calculation of input tax. Where, on the other hand, the absence of evidence relates to a historical claim which could not have been brought earlier because of deficiencies in the UK legislation, or Government practices relating to claims for input tax by public authorities, such evidence as is available should be taken into account."
The case would be remitted to a differently constituted First-tier Tribunal to consider in accordance with further guidance given by the court.