The Supreme Court recently and unanimously agreed that for a taxpayer to reclaim VAT they must first be able to prove how much VAT they have incurred. In HM Revenue and Customs (HMRC) v NHS Lothian the court upheld previous rulings that had found NHS Lothian had failed to adequately quantify its claims for under-recovered input tax, concluding there was not sufficient evidence to support the claim.

This was an historical claim that related to business supplies where NHS Lothian had not reclaimed the input tax in a period between 1974 and 1997 (the ‘claim period’). The labs’ main work was providing clinical services to the NHS but they also undertook some private work. Where the work was related to the NHS there was no input tax. But where the work was private, there was input tax, which in theory could be reclaimed. 

The issue NHS Lothian had was that they did not have sufficient records to show how much input VAT had been paid for the work done in the labs, so it valued its claim by “applying to the total amount of VAT incurred, the percentage of its activity that was business activity for the year 2006/2007. That percentage was 14.7%. This was then used as a baseline and adjusted to work out the proportion of total input VAT it was entitled to recover for each year over the claim period”. This was rejected by HMRC and NHS Lothian’s appeal to the First-tier Tribunal was rejected. 

The Supreme Court upheld the position that in order to quantify the claim the taxpayer must either provide the documents (i.e. the VAT invoices from suppliers showing input VAT paid) – or provide a “credible method for estimating the amount of the claim” for HMRC to estimate with reasonable certainty.

The standard of proof applied to NHS Lothian’s claim is the balance of probabilities which applies in the same way to all historic tax claims. The Supreme Court noted that the “court’s role is not to act as forensic accountant and the principle of effectiveness does not require this.. The Supreme Court holds that the principle of effectiveness was not infringed in this case. HMRC’s and the FTT’s approach did not make NHS Lothian’s claim virtually impossible or excessively difficult to enforce”.

Although relating to historic claims and Scottish law, it is worth noting and making sure sufficient and accurate records are kept - and that it is not HMRC’s responsibility to retain records in case of a future claim.