[2014] UKFTT 170 (TC)
TC03308
Appeal number:
TC/2012/02647
VAT –input tax – Fleming
claim.
FIRST-TIER TRIBUNAL
TAX CHAMBER
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ST GEORGE’S
HEALTHCARE NHS TRUST
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE RICHARD BARLOW
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MARK BUFFERY
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Sitting in public at London on 2 and 3 July 2013.
Mr David Southern of counsel
for the Appellant
Mr Richard Mansell of the
office of the General Counsel and Solicitor to HM Revenue and Customs, for the
Respondents
© CROWN COPYRIGHT
2014
DECISION
1.
This appeal concerns claims made by the appellant for input tax it
contends it did not claim in the period 1 April 1973 to 31 March 1997. The
claims relate to the supplies of drugs, medicines and prosthetics the appellant
claims to have made to private out patients in that period. The claims total
£179,191.95 and are what are called ‘Fleming claims’ which means they depend
upon section 121 of the Finance Act 2008 and regulation 29(1) of the VAT
General Regulations 1995 because, were it not for those provisions, the claims
would have been out of time.
2.
The parties have asked us to make some preliminary findings at this
stage which it is hoped may enable them to agree the actual sums recoverable,
if any.
3.
In fact, during the hearing HMRC indicated a good many points on which
they now agree the appellant has produced sufficient evidence to recover some
of the amount claimed. However, as we are being asked, in effect, to endorse
the methodology of the claim we think it appropriate to record our findings in
full even where the Commissioners have agreed with the appellant’s contentions.
4.
The appellant is now a National Health Service Trust and has been since
5 March 1993 when the property, rights and liabilities of a predecessor body,
which had been a Health Authority, were transferred to it by the Secretary of
State. We hold that the right to claim input tax was transferred at that
time. The case of Midlands Co-operative Society Ltd –v- HMRC [2008] STC
1803 is authority for the proposition that an assignment under a statutory
scheme can pass such rights to a successor. In the period since 1973 the
hospital had been the subject of several such re-constitutions.
5.
Initially, HMRC had denied the claim for the period 1 April 1973 to 31
March 1982 because of a lack of formal evidence of transfer of rights between
predecessor bodies. We find that the hospital had been operated without
interruption throughout the period in question. Several witnesses were called
who were able to confirm that the hospital had been operated continuously and
indeed HMRC do not dispute that fact. It is overwhelmingly likely that proper
formal steps would have been taken and overseen by the Government to transfer
the rights and liabilities such that we can make a presumption of regularity and
hold that the rights and liabilities were transferred at each stage when that
became necessary. At the hearing HMRC agreed that was the case.
6.
The background to this appeal is the changing understanding of the
correct treatment of the supply of medicines and drugs over the years since the
introduction of VAT.
7.
It was not appreciated that a supply of medicines could give rise to a
claim for input tax until the Court of Appeal decided the case of Customs
and Excise Commissioners –v- Wellington Private Hospital [1997] STC 445 but
that judgment was questioned following the case of Card Protection Plan –v-
Customs and Excise Commissioners [1999] STC 270. The Wellington case
was then superseded by the VAT (Drugs, Medicines and Aids for the Handicapped)
Order 1997.
8.
The commissioners held the view that the supply of medicines could only
be zero rated, and therefore could only give rise to an input tax claim, if the
supply was by an independent pharmacist; with the consequence that a supply by
a hospital would not be zero rated. They promulgated that opinion in December
1992 and January 1993 but acknowledged that it was wrong in March 2005.
9.
The position now, so far as is relevant to this appeal, is that
medicines and drugs are zero rated if they are supplied to outpatients by
hospitals and the patients are paying for them.
10.
A National Health Service Trust has functions which mostly fall outside
the scope of VAT because they are not the making of supplies by way of
business. Equally, such a body has some functions that are business in the
normal sense of that word such as providing a cafeteria or restaurant for
visitors or parking facilities. The provision of private health care is also a
supply by way of business but much of that activity is exempt from VAT. The
appellant was registered for those purposes at times material to this appeal
and recovered some input tax in respect of the taxable supplies it was making.
As already explained, the claim in this case relates to the zero-rated supply
of medicines, drugs and prosthetics to private out patients where input tax was
incurred but not claimed at the relevant time. One of the aspects of the claim
that needs to be considered is whether or not the appellant has been able to
show that the amounts now being claimed had not previously been claimed.
11.
In addition, there is a special scheme, under section 41 of the VAT Act
1994, which applies, amongst others, to bodies exercising functions on behalf
of a Minister of the Crown by which they can claim recovery of sums that would
have been input tax had they been in business. We need not describe the
details of that scheme but again a question arises as to whether any recovery
may already have been made under it which is being duplicated under the present
claim. That scheme is known as the Contracted Out Services Rules and we will
refer to it as the COS scheme.
12.
We heard evidence from three witnesses for the appellant. They were
Dominic Sharp ACA, currently the deputy finance director of the hospital, Scott
Harwood MIIT VAT consultant and Simon Merry VAT consultant. The consultants
are from the Berthold Bauer consultancy. The respondents’ witness was Gary
Kennedy Higher Officer Tax Specialist of HMRC who was in charge of examining
NHS Fleming claims. We accept that the evidence of all the witnesses was
truthful. The appellant’s witnesses had not been involved with the Trust or
its predecessors for the whole period and much of their evidence was based on hearsay
or assumptions about how things may have been dealt with in the past. They did
have a close knowledge of the Trust’s current operations and methods and
although we will have to consider the validity of their assumptions we do regard
their evidence as both credible and helpful. Mr Kennedy had no direct
knowledge of the operation of the Trust and his evidence was mainly concerned
with the methodology of the claim.
13.
Mr Sharp told us that he had worked for the Hospital for four years. He
deals with payroll, payment for supplies and VAT. He had talked to current
private patient managers and an accountant who had worked in the Hospital since
1986 and all stated their belief that the Hospital had catered for private
patients throughout the period from 1973 and he concluded that that had been
the case. Although detailed figures for private patient income are now only
available from 1993/4 we are satisfied and find that private patients were
treated at all material times.
14.
Mr Sharp was questioned by Mr Mansell about whether the proportion of
private patient income attributable to outpatient drugs may have risen in the
later years of the claim because of the cost of drugs for newer treatments such
as those for IVF and HIV. He said that he doubted that would be the case and
that the Hospital’s particular specialisations were cardiac and neuroscience
rather than IVF and HIV.
15.
Mr Sharp also said that he doubted if the Hospital would have used an
outside pharmacy at any relevant time and would always have had its own
internal pharmacy.
16.
The rest of the evidence deals with the method adopted to calculate the
claim and to justify it. We will make some observations about the nature of
such a claim before we consider the evidence.
17.
The Fleming claims arose because of misunderstandings about recoverable
input tax and claims made within a certain period of time, including the claim
in this appeal, are allowed to be made for the whole period in which VAT
applied, rather than the limited periods now applicable. Such claims are
possible because of section 121 of the Finance Act 2008 and the very fact that
there had to be a specific provision for them shows that they fall outside the
norm for VAT input tax claims.
18.
Section 121 refers to the claims as ones “for which the applicant held
the required evidence”. It is significant that the past tense is used. There
are requirements for record keeping in the VAT legislation and normally the
Commissioners seek to interpret that legislation very strictly and often in
litigation in the Tribunal they attempt to seek proof by way of documentary
evidence to an absurd degree of detail. As Mr Southern pointed out, given that
Parliament specifically legislated for claims going back well before the time
for which traders are required to keep records and given the reference to
records “held” in the past; it must have been Parliament’s intention that the
usually strict requirements are not applicable. That inevitably leads to a
conclusion that something of a broad brush approach is possible and we agree
with Mr Southern that that is the case. Indeed the respondents’ published
guidance shows that they accept that is the case. We would perhaps use an
expression such as a reasonable degree of proof given the circumstances rather
than broad brush but nothing turns on that.
19.
We will therefore describe and comment on the method actually adopted.
20.
In order to make a valid claim it seems clear that three steps are
needed. The first is to identify what input tax could have been claimed. The
second is to identify how much, if any, was claimed in the past. The third is
then to compare the two and the claim should then be the difference if it has
been demonstrated that the amount claimed was less than it could have been.
21.
The method adopted so far as identifying the amount that could have been
claimed was as follows. We set it out step by step:
·
(Step One) For the years 2005/6, 2006/7 and 2007/8 only, the
Trust has records of what the proportion of drugs supplied to private out
patients was compared to the total drugs expenditure of the Hospital. It was
.63%, .88% and 1.39% which averages .97%.
·
(Step two) For each year of the claim the private patient
income was identified as a proportion of the estimated total income of the
Hospital.
·
(Step three) For each year of the claim the total drugs
expenditure of the Hospital was identified or estimated and the total private
patient drugs income was then expressed as the same proportion of the total
drugs expenditure as private patient income was as a proportion of the overall
income (as calculated at step two).
·
(Step four) For each year of the claim the actual amount of
the private out patients’ drugs income was calculated by dividing the figure
derived from the .97% at step one by the total private patients drug figure
derived at step three with the consequence that the .97% was reduced to .87% of
the overall drugs expenditure.
·
(Step five) The VAT on the figure calculated at step four was
calculated and claimed.
22.
A number of issues arise in connection with those steps.
23.
As far as step one is concerned we hold that it would be better to take
a weighted average of the three years rather than just a mathematical average
of the percentages.
24.
For step two the total income of the hospital was not known for all the
years covered by the claim. Mr Harwood said that in order to calculate what it
had been in all the years, he had taken 1993/4 as the base year and he found
that between then and 2007/8 the average increase in income had been 8% a
year. For years before 1993/4 he worked the figures back deducting 8% each
year. HMRC questioned this and proposed that a figure for increases in
expenditure for the NHS as a whole would have given a more accurate figure
although, as they had not in fact attempted to make that calculation
themselves, we have no way of knowing whether that calculation would have
proved more or less advantageous to the appellants than the one taken by Mr
Harwood.
25.
HMRC argued that the earliest known year i.e. 1993/4 should be taken as
the basis of these calculations because it is their practice that the earliest
year should always be the basis because it is the nearest to the Fleming claim
as they put it.
26.
Mr Harwood gave evidence that he had worked forward from 1993/4 applying
the RPI index increases for each year and had found that that arrived at a less
accurate figure for 2007/8 than applying the 8% forwards as well as backwards
from 1993/4 would have done. He felt therefore that the 8% figure was
corroborated by that exercise and we agree that it should be used as the basis
for the calculation of the total income for the years before 1993/4.
27.
We find that that is a more satisfactory basis for a method to be used
by the appellant than taking the earliest year without more would have been and
we therefore reject HMRC’s contention about that particular aspect of the
calculations.
28.
Step two also makes the assumption that private patient income as a
proportion of the whole income had been consistent over the years. Proof of
that was largely based on anecdotal evidence gleaned by Mr Harwood in
conversation with staff of the Hospital none of whom had actually worked there
throughout the period. In the absence of any other evidence and given that
estimates are necessarily being used we hold that that is a reasonable
assumption to apply.
29.
Step three involves taking the known or estimated private patient income
and expressing it as a proportion of the total income. The ratio between the
two is assumed to have been constant before 1993/4 and so the 8% annual
decrease is therefore applied to both figures.
30.
At step four the figure for private outpatient drug use (.97%) was
applied to the ratio of private outpatient drugs to total private patient drugs
for the years for which those figures were available and that resulted in a
calculation that private outpatient drugs were .87% of total drugs. As we have
found that the .97% should be amended to .94% the final figure should be .84%
of the total drugs figure.
31.
Finally at step five the relevant VAT fraction was applied to find the
actual input tax which could be claimed on private outpatient drugs.
32.
We should add that at each stage where it was relevant the outpatient
drugs figure was itself calculated after deducting purchases of blood products
and the appellant claims also after any purchased within the intra health
service market were deducted. It was left open at the hearing as to whether
that last point was in fact correct, that is to say whether intra health service
supplies have been excluded. That is a point the parties may wish to pursue
further and we make no finding on it at this stage.
33.
With the minor adjustments and qualifications mentioned above we endorse
the method used by the appellant as being appropriate and as arriving at a
justifiable figure for the claim.
34.
We are satisfied from the evidence we heard that the appellant has not
duplicated any claims for input tax previously claimed. The record keeping
methods used in the NHS to record purchases and sales as net or gross as
required precluded any such deduction at the time and so preclude any
duplication. That is the case both for the appellant’s normal VAT return and
its COS scheme activities.
35.
Mr Kennedy in his evidence and Mr Mansell in closing accepted most of
what had been done in the calculations once they had been explained and tested
in evidence.
36.
They still contend for taking 1993/4 as the basis at step two but we
have rejected that contention.
37.
In addition to the claims for input tax not previously claimed on
purchases of drugs which were supplied to private outpatients the appellant
also makes a claim based on its contention that the amount of tax it could have
claimed under a partial exemption calculation is now higher than the amount it
had claimed because of the increased proportion of taxable supplies to which
such input tax can be attributed.
38.
HMRC accepted that claim in principle but subject to discussions between
the parties by which it is hoped HMRC will be satisfied that certain items of
expenditure that should be excluded from such a claim have been excluded. It
was agreed that the tribunal need not make any decision on those issues, if any
arise, at this stage.
39.
The appellant has indicated that it will claim interest on such sums as
are now payable to it but the amount cannot be worked out at this stage because
the amounts repayable are as yet not finally known.
40.
We therefore release this part decision and give the parties leave to
seek a further hearing to resolve any issues that remain undecided and/or
un-agreed following the release of this decision. We direct that either party
is to have leave to notify the tribunal within six months of the release of
this decision that it wishes to have a further hearing and that if no such notification
is made within that time then both parties are to notify the tribunal
immediately after the expiration of that six month period that no further
hearing will be required.
41.
This document contains full findings of fact and reasons for the decision.
Any party dissatisfied with this decision has a right to apply for permission
to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier
Tribunal) (Tax Chamber) Rules 2009. The application must be received by this
Tribunal not later than 56 days after this decision is sent to that party. The
parties are referred to “Guidance to accompany a Decision from the First-tier
Tribunal (Tax Chamber)” which accompanies and forms part of this decision
notice.
RICHARD BARLOW
TRIBUNAL JUDGE
RELEASE DATE: 6 February 2014
