Commissioners for His Majesty’s Revenue and Customs v NHS Lothian Health Board (Scotland)

A taxable person claiming historic input VAT must prove, on the balance of probabilities, both that deductible tax was incurred and its amount. Invoices are not indispensable where alternative evidence is permitted. The alternative method must nevertheless enable a reasonably certain estimate close to the tax actually incurred.

The EU principle of effectiveness removes procedural rules which make enforcement of EU rights virtually impossible or excessively difficult. It does not guarantee that every historic claim can be quantified, require a proportionality exercise, relax the ordinary standard of proof, or oblige a tribunal to construct a claimant’s case. Estimates and extrapolations remain admissible, but their reliability must be proved.

NHS Lothian claimed approximately £900,000 of input VAT incurred by its laboratories between April 1974 and April 1997. Some laboratory work was taxable business activity, but surviving records did not establish the historic division between business and non-business activity. NHS Lothian extrapolated a 14.70% business-use ratio calculated for 2006–07.

The First-tier Tribunal dismissed the claim because that extrapolation did not establish the deductible amount. The Upper Tribunal upheld its decision: [2018] UKUT 218 (TCC). The Inner House allowed a further appeal and ordered a rehearing, holding that the EU principle of effectiveness required a more flexible evidential approach: [2020] CSIH 14.

The central issue was whether the Inner House had identified an error of law in the tribunals’ approach to proof, effectiveness, state fault or quantification.

1. Appeal allowed unanimously. Lady Rose gave the judgment, with which Lord Reed, Lord Briggs, Lord Sales and Lord Leggatt agreed. The First-tier Tribunal made no error of law, and the Upper Tribunal was right to uphold its decision.

2. A claimant must prove how much input tax it is entitled to deduct. Showing that some taxable activity occurred and that some VAT-bearing supplies were acquired does not create a theoretical right whose amount HMRC must disprove. The approach in Vădan confirmed that even clear evidence of taxable activity cannot replace proof of the existence and scope of the deduction. Where prescribed invoices are unavailable, section 24(6)(a) of the Value Added Tax Act 1994 and regulation 29(2) of the Value Added Tax Regulations 1995 permit alternative evidence. That evidence must provide a credible method enabling an estimate, with reasonable certainty, close to the tax actually incurred.

3. The EU principle of effectiveness did not require a proportionality exercise or make quantification possible in all but exceptional cases. It addresses procedural obstacles which, by their nature, make enforcement of EU rights virtually impossible or excessively difficult. It does not require waiver of an otherwise proper evidential rule merely because a particular claimant encounters difficulty. The ordinary burden and balance-of-probabilities standard therefore applied.

4. Estimates, assumptions and extrapolations were legally available. HMRC and the tribunal did not insist on original invoices or annual primary data. They permissibly required evidence connecting the 2006–07 ratio with the much earlier claim period. Neither documentary nor oral evidence established that connection. Sanofi did not authorise immediate or automatic presumptions from insufficient evidence.

5. The tribunal was not required to act as a forensic accountant and devise NHS Lothian’s case. It could reach an intermediate figure supported by the evidence, provided both parties had an opportunity to address any new method. No reliable alternative figure was available here.

6. Alleged state fault did not justify leaning towards the claim. The United Kingdom had not failed generally to implement the right of deduction; the defect concerned the absence of transitional arrangements when a lawful time limit was introduced. Public bodies receive no different evidential treatment from private taxpayers. Article 242 of the Principal VAT Directive and regulation 31 placed record-keeping responsibility on the taxpayer. Fault should not alter the standard of proof, although unavailable records may in practice prevent proof.

1. United Kingdom Supreme Court: Allowed HMRC’s appeal unanimously and restored the result reached by the First-tier Tribunal, holding that the tribunal had made no error of law: [2022] UKSC 28.
2. Inner House of the Court of Session: Allowed NHS Lothian’s appeal, overturned the tribunal decisions and remitted the case to a differently constituted First-tier Tribunal: [2020] CSIH 14; [2020] STC 1112; 2020 SC 351.
3. Upper Tribunal: Dismissed NHS Lothian’s appeal, holding that the evidence did not provide a sufficiently reliable basis for the historic claim: [2018] UKUT 218 (TCC); [2018] STC 1745.
4. First-tier Tribunal: Dismissed the appeal against HMRC’s refusal because NHS Lothian had not established the amount of deductible input tax: [2017] UKFTT 522 (TC).