Introduction

The case of NHS Lothian Health Board against HMRC ([2020] CSIH 14) presents a pivotal appellate decision from the Scottish Court of Session's Inner House. The central issue revolves around the NHS Lothian Health Board's historical claim for repayment of overpaid Value Added Tax (VAT) incurred between 1974 and 1997. This appeal challenges the Upper Tribunal's rejection of the claim, emphasizing the principles of effectiveness under EU law, and seeks to establish a framework for quantifying such historical VAT claims despite the absence of primary evidence.

Summary of the Judgment

The NHS Lothian Health Board appealed against the Upper Tribunal's decision to reject its claim for £929,874.69 in overpaid input VAT. The Tribunal had previously dismissed the claim on grounds that the available evidence was insufficient to accurately quantify the amount owed. However, the Court of Session held that the Tribunal imposed an overly stringent standard, contrary to the EU's principle of effectiveness, which mandates that legal rights must be practically enforceable. Consequently, the Court allowed the appeal, remitting the case back to the First-tier Tribunal for reconsideration with instructions to adopt a more flexible approach in evaluating the evidence and methodologies used for quantifying the VAT claim.

Analysis

Precedents Cited

The judgment extensively references key precedents that shape the landscape of VAT recovery claims:

• Fleming (trading as Bodycraft) and Condé Nast Ltd v HMRC [2008]: Established the framework for historical VAT claims and influenced the enactment of section 121 of the Finance Act 2008.
• Case C-00/35, Marks & Spencer PLC v Customs and Excise Commissioners [2002]: Highlighted the incompatibility of retrospective time limits without transitional provisions under EU law.
• Amministrazione delle Finanze dello Stato v San Giorgio SpA [1983] CMLR 658: Defined the principle of effectiveness, stating that national laws should not render EU rights "virtually impossible or excessively difficult" to enforce.
• Francovich v Italy and Bonifaci v Italy [1993] 2 CMLR 66: Emphasized the necessity for remedies to ensure the full effectiveness of Community law.
• Test Claimants in the Franked Investment Income Group Litigation v Revenue and Customs Commissioners [2012]: Reinforced the principles of effectiveness and legal certainty in the enforcement of EU law rights.
• Revenue and Customs Commissioners v General Motors (UK) Ltd [2015]: Asserted the Tribunal’s duty to determine claims based on the balance of probabilities without acting as detectives.
• NW v Sanofi Pasteur MSD SNC [2018] CMLR 16: Established that national courts must not apply evidentiary rules that undermine the effectiveness principle.

Legal Reasoning

The Court of Session scrutinized the Upper Tribunal's adherence to the EU principle of effectiveness. It determined that the First-tier Tribunal's refusal was excessively restrictive, particularly in its demand for primary evidence that had been systematically destroyed or was otherwise unavailable due to historical practices and legislative shortcomings. The Court emphasized that the inability to produce primary records should not preclude the quantification of VAT claims, especially when secondary evidence and logical inferences support the claimant’s position.

The judgment underlined that the principle of effectiveness necessitates a balanced approach where the Tribunal must leverage available evidence and apply reasonable methodologies to ensure that the claimant's rights are not rendered ineffective by procedural hurdles.

Impact

This decision reinforces the enforceability of historical VAT recovery claims by mandating a more lenient and pragmatic evaluation of evidence. It sets a precedent that Tribunals must accommodate the practical realities of historical claims, particularly when primary evidence is lacking due to factors beyond the claimant’s control. Future cases will benefit from this flexible approach, potentially increasing the success rate of similar claims by public bodies and ensuring compliance with EU principles of effective legal remedies.

Complex Concepts Simplified

Principle of Effectiveness

The principle of effectiveness is a cornerstone of EU law, ensuring that rights conferred by EU legislation are not merely theoretical but are practically enforceable. It prohibits national laws from imposing such stringent requirements that claiming EU rights becomes "virtually impossible or excessively difficult."

Historical VAT Claims

Historical VAT claims involve seeking repayment for VAT that was not reclaimed in previous years, often spanning decades. These claims can be complex due to the potential lack of detailed financial records from the relevant periods.

Balance of Probabilities

This is the standard of proof in civil cases, requiring that a claim is more likely to be true than not. In the context of VAT recovery, it means that the claimant's calculation of overpaid VAT must be shown to be more probable than that it was not overpaid.

Business/Non-Business Apportionment vs. Partial Exemption

Business/non-business apportionment involves dividing activities between taxable (business) and non-taxable (non-business) to determine recoverable VAT. Partial exemption, on the other hand, refers to situations where a VAT-registered entity makes both taxable and exempt supplies, complicating the recovery of input VAT.

Conclusion

The NHS Lothian Health Board v HMRC [2020] CSIH 14 judgment marks a significant affirmation of the EU's principle of effectiveness within the realm of historical VAT recovery claims. By compelling Tribunals to adopt a flexible and evidence-inclusive approach, the decision ensures that rightful claims are not unjustly thwarted by procedural rigidities or the absence of primary records. This case underscores the judiciary's role in upholding substantive rights and provides a robust framework for future entitlements to VAT repayments, thereby strengthening legal protections for entities navigating historical financial reconciliations.