Introduction

The case of Lothian NHS Health Board v. Revenue And Customs ([2015] BVC 519) was adjudicated by the Upper Tribunal (Tax and Chancery Chamber) on May 28, 2015. This case revolved around the appellant, Lothian NHS Health Board, seeking to recover input VAT underclaimed between 1974 and 1997. The key issue was whether the First-tier Tribunal erred in refusing the appeal due to insufficient evidence to establish a "tolerably acceptable calculation" of the VAT claim. The respondents in this case were The Commissioners for Her Majesty's Revenue and Customs (HMRC).

Summary of the Judgment

The Upper Tribunal upheld the decision of the First-tier Tribunal (FtT) which refused the appellant's claim for recovering historic input VAT. The claim, amounting to £1,416,737.87, was dismissed on the grounds that the appellant failed to provide sufficient evidence to substantiate an acceptable calculation of the unrecovered VAT over a 23-year period. The Tribunal emphasized the onus of proof resting on the claimant and determined that the evidence presented was too sparse and generalized to meet the required standard. Consequently, the appeal was refused, and the Tribunal reiterated the necessity for precise documentation in such claims.

Analysis

Precedents Cited

The judgment references several key cases that influenced the Tribunal’s decision:

• Fleming (t/a Bodycraft) v HMRC [2008] STC 324: This case led to the restoration of the right to recover underclaimed input VAT, which was previously capped in 1997.
• Amministrazione delle Finanze dello Stato v SpA San Giorgio [1983] ECR 3595: Established the principle that any requirement of proof making VAT recovery impossible or excessively difficult violates EU law.
• Test Claimants in the FII Group Litigation v HMRC [2012] STC 1362: Reiterated the prohibition of onerous procedural requirements in enforcing community law rights.
• General Motors UK Ltd v HMRC [2013] UKFTT 443 (TC): Addressed evidential difficulties in VAT claims and rejected a two-stage approach in such cases.
• St George's Healthcare NHS Trust v HMRC [2014] UKFTT 170 (TC): Demonstrated that without agreement on the amount claimed, the Tribunal could not determine a figure on insufficient evidence.

Legal Reasoning

The Tribunal's legal reasoning centered on the strict adherence to the burden of proof imposed by the Value Added Tax Act 1994 (VATA 1994), specifically section 83(1)(c). The appellant was required to demonstrate, on the balance of probabilities, a credible and precise calculation of the unrecovered input VAT. Despite the historical nature of the claim leading to sparse and non-specific evidence, the Tribunal maintained that without a "tolerably acceptable calculation," the claim could not be substantiated.

Furthermore, the Tribunal asserted that the principle of effectiveness, though important, did not mandate a relaxed standard of proof. The appellant's inability to link historical financial records to their VAT claim undermined the reliability of their calculation, thereby justifying the refusal.

Impact

This judgment reaffirms the stringent requirements for claiming historic VAT recovery. It underscores the necessity for precise documentation and calculation methodologies, even when legal provisions aim to facilitate such claims retrospectively. Public authorities and other entities must ensure diligent VAT record-keeping to avoid challenges in future recoveries. Additionally, the case clarifies that tribunals are not obliged to adopt flexible or inferential approaches in the absence of concrete evidence.

The decision also emphasizes that legislative changes, like those introduced by the Finance Act 2008, do not override the fundamental principles of burden of proof and evidence quality in tax recovery claims.

Complex Concepts Simplified

Input VAT and Exemption Methods

Input VAT: This is the VAT a business pays on its purchases and expenses. Recovering input VAT means reclaiming this tax from the government, reducing the overall tax burden.

Exemption Methods: These are accounting methods used by VAT-registered entities to calculate the portion of input VAT that can be reclaimed when their activities involve both taxable and exempt supplies.

Principle of Effectiveness

This principle, stemming from EU law, ensures that individuals and businesses can effectively exercise their legal rights. In the context of VAT recovery, it implies that the procedures should not make it excessively difficult to reclaim taxes.

Burden of Proof

In legal terms, the burden of proof refers to the obligation to prove one's assertion. Here, the appellant had the responsibility to provide convincing evidence of the VAT underclaim.

Tolerably Acceptable Calculation

This term refers to a calculation that, while not perfect, is sufficiently reasonable and credible to support a claim. The Tribunal found that the appellant's calculation did not meet this threshold.

Conclusion

The Lothian NHS Health Board v. HMRC [2015] case serves as a pivotal reference for entities seeking to recover historic input VAT. It highlights the critical importance of maintaining comprehensive and precise financial records to substantiate VAT claims. The Tribunal's adherence to the burden of proof and refusal to accommodate vague or generalized evidence underscores the judiciary's commitment to fairness and accuracy in tax matters. Consequently, organizations must prioritize meticulous VAT documentation to navigate potential future disputes effectively.