Revenue and Customs v NHS Lothian Health Board (Scotland) [2022] UKSC 28

NHS Lothian claimed recovery of historic VAT input tax from 1974-1997 on laboratory services, relying on extrapolation from recent years. The Supreme Court allowed HMRC's appeal, holding the taxpayer must prove the amount of input tax incurred, not merely that some was paid. The principle of effectiveness does not require relaxation of evidentiary standards.

Facts

NHS Lothian Health Board submitted a late claim to HMRC seeking recovery of VAT input tax paid between 1974 and 1997 on goods and services used by laboratories providing both NHS clinical services and fee-paying services to external bodies. The claim was made pursuant to section 121 of the Finance Act 2008, which opened a window for such historic claims following the House of Lords decision in Fleming. NHS Lothian sought to prove its entitlement by extrapolating a 14.70% business activity ratio from 2006/07 accounts back through the claim period, as primary accounting records had been destroyed.

Procedural History

HMRC rejected the claim. The First-tier Tribunal (FTT) dismissed NHS Lothian’s appeal, finding insufficient evidence to establish the claimed input tax. The Upper Tribunal upheld the FTT’s decision. The Inner House of the Court of Session reversed these decisions, holding the tribunals had applied too exacting a standard and failed to apply the EU principle of effectiveness.

Issues

1. Whether the Inner House erred in distinguishing between establishing a right to deduct some input tax and quantifying that tax.

2. Whether the EU principle of effectiveness required a more flexible approach to evidence.

3. Whether alleged state fault justified relaxing evidentiary requirements.

4. Whether the Inner House was entitled to interfere with the tribunal decisions.

Judgment

The Supreme Court unanimously allowed HMRC’s appeal. Lady Rose delivered the judgment.

The Nature of the Right to Deduct

The Court held the Inner House erred in treating establishment of a right as separate from quantification. Relying on the CJEU decision in Vădan, Lady Rose stated:

proof of the amount of input tax incurred by whatever documentation the tax authority requires is a precondition of the right to deduct that or any amount – there is no theoretical right to deduct which the taxpayer can assert.

Principle of Effectiveness

The Court rejected the argument that the principle of effectiveness required relaxation of normal evidentiary standards. Lady Rose held:

It goes too far to describe the principle of effectiveness as requiring the tribunal to carry out a proportionality exercise in the sense that that term is commonly used… It was also wrong to paraphrase the principle of effectiveness as posing a question whether the taxpayer’s right to recover input tax can be made effective in practice.

The Court noted HMRC had adopted a flexible approach, accepting estimates and extrapolations in principle, but NHS Lothian simply failed to provide credible evidence linking the 14.70% ratio to the claim period.

State Fault

The Court found no relevant state fault. There was no failure to implement EU law properly; the only illegality was imposing a time limit without transitional provisions, which was remedied by section 121. The destruction of HMRC records was irrelevant as the obligation to keep records rested on the taxpayer.

Implications

This decision clarifies that taxpayers claiming historic VAT input tax must prove the amount claimed, not merely that some input tax was incurred. The EU principle of effectiveness does not require tribunals to accept inadequate evidence or conduct forensic exercises on behalf of claimants. The burden of proof remains on the taxpayer to the civil standard, and responsibility for maintaining records lies with the taxpayer, not HMRC.

Verdict: Appeal allowed. The Supreme Court held the First-tier Tribunal committed no error of law in rejecting NHS Lothian’s claim for historic VAT input tax recovery.

Source: Revenue and Customs v NHS Lothian Health Board (Scotland) [2022] UKSC 28