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How non business income affects VAT recovery

31st Mar 2022
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The Colin Newell FTT decision follows the logic of the Supreme Court in Frank A Smart & Son Ltd [2019] SC 39, as well as a series of ECJ decisions (para 58). The situation arises where a taxpayer receives income from grants or subsidies or other outside the scope sources. In such cases, input tax is not apportioned.

Mr Newell joined the Renewable Heat Incentive (RHI) scheme, which operated in Northern Ireland, to encourage investment in renewable technologies. Over a 15-month period, nearly 29% of his income was from RHI.

Mr Newell’s Counsel argued that receipt of a subsidy does not prejudice input tax recovery by a fully taxable person. Alternatively, where a person made only taxable supplies, he was entitled to recover input tax incurred in order to qualify for the subsidy. (Paras 54-68 provide a helpful analysis of the case law in this respect.)

HMRC’s argument showed a confusion between the receipt of income and the making of supplies (para 69-70). They had failed to understand that receipt of money does not necessarily constitute the making of a supply. (This is basic stuff! Simply to ‘follow the money’ is to descend a rabbit hole in the world of VAT!) VAT is a tax on supply.

One case which caused the FTT some thought was the Upper Tier decision in Vehicle Control Services [2016] UKUT 316, (VCS). Over 90% of its income was from penalties for breaching the terms of car parking tickets by drivers. In this case, the taxpayer conducted its economic activity to generate income from tickets and from penalty charges. The FTT commented that, where a taxpayer receives outside the scope income from an outside the scope activity, its input tax must be restricted. But, where a taxpayer receives outside the scope income without an outside the scope activity, input tax is not to be restricted (para 93, re-worded by me!). The FTT considered the VCS decision an outlier.

The FTT also considered the ‘direct and immediate link’ question, something frequently referred to in relation to input tax. The key is that there is such a link between the purchases on which input tax is claimed and the taxable outputs.


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