Milton Keynes Hospital NHS Foundation Trust – decision of the Upper Tier Tribunal (UTT)

30 July 2020

Liaison Financial

The UTT has released its decision concerning this appeal, and has supported the decision of the First Tier Tribunal (FTT) finding in favour of HMRC that they were entitled to issue assessments to recover overclaimed COS VAT under section 73 of the VAT Act 1994.


For many years, there has been inequitable treatment relating to COS VAT errors.

HMRC can issue assessments to recover overclaims of COS VAT covering a 4-year period. However, where an underclaim of COS VAT is discovered, the NHS is restricted to claiming VAT that has been incurred in the current financial year plus the 4-month concessionary extension following year-end. To compound this inequity, HMRC also denied the right of appeal to a Tribunal against assessments issued for COS overclaims.

The NHS therefore must repay COS VAT incurred in a 4-year period that, in the opinion of HMRC, has been overclaimed, without a formal right of appeal. This is despite the subjective nature of COS VAT recovery and the frequent uncertainties concerning the interpretation of HMRC’s guidance on the COS VAT.

Our client, Milton Keynes Hospitals NHS Foundation Trust (the Trust), received a 4-year assessment from HMRC concerning COS VAT claimed under heading 14 (computer services) of the COS Treasury Direction. Liaison Financial, in conjunction with the Trust, identified a potential error in HMRC’s reliance on section 73 of the VAT Act 1994 for its powers to assess for COS VAT overclaims.

In summary, the argument is that COS VAT is not input tax as defined by VAT legislation but is an amount paid under a public sector refund scheme that operates outside of the normal VAT system. Section 73 of the VAT Act 1995 could therefore not be used by HMRC to issue 4-year assessments.

Success in this case would have rendered HMRC’s assessment at the Trust invalid and it would also have implications for other NHS bodies that had previously been assessed for overclaims of COS VAT. However, if HMRC were correct in using its powers to assess under VAT legislation, then there must be a right of appeal to the Tribunal against HMRC’s assessments. An appeal was therefore made in order for the Tribunal to consider the preliminary issue – does HMRC have the power under VAT legislation to issue 4-year assessment?

Liaison Financial would not have been able to take this case forward without the cooperation of the Trust and their willingness for the assessment issued against them by HMRC to be used as a test case to be put before the FTT and UTT.

The decisions of the FTT and UTT

In respect of the preliminary issue, both the FTT and UTT have found in favour of HMRC.

The Tribunals concluded that section 73 of the VAT Act does permit HMRC to issue assessments for overclaims of COS VAT and that although it was accepted by the UTT that COS VAT was not by definition input tax, that did not result in the conclusion HMRC could not use its powers under section 73 to claw-back perceived overclaims of COS VAT.

Where does this litigation leave the NHS?

The Trust can seek the permission of the UTT to appeal the decision to the Court of Appeal on a point of law in respect of the preliminary issue. Additionally, if it is decided not to litigate any further on the preliminary issue, the Trust has the option of remitting the case to the FTT to decide on the secondary issue – i.e. HMRC has the legal power to issue an assessment, but is the assessment correct in relation to the heading 14 COS VAT claimed by the Trust?

A decision has yet to be made as to whether to seek to appeal either the preliminary or secondary issues.

However, to date, as a result of taking this issue to the Tribunal, the Trust and the rest of the NHS has won the right of appeal against HMRC’s COS assessments. This right is something that HMRC has denied since the COS regime was introduced in 1983 and is an important legal milestone that will prove useful in the years to come by ensuring that HMRC are held to account when they assess for COS VAT overclaims.

To discuss this issue further, please contact your Liaison Financial VAT Advisor, or email

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