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VAT: Real business activities required


Who would have thought the supply of hay could provoke such a long-running tax dispute. Rickie Lowery reports on the latest episode in the Babylon Farm case.

7th Dec 2021
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A farming company with a single customer, and one product sold at below market rate, was not entitled to recover input VAT, as it wasn’t running a business for VAT purposes.

The matter was considered from different angles by the first tier tribunal (FTT) in 2019 followed by the upper tribunal (UT).

Sunny days

Babylon Farm Limited made hay as the seasons allowed and sold it to a director/shareholder of the company to use in their separate business.

HMRC sought to disallow input VAT claims spanning several years on the basis there was no business activity. The majority of the input tax related to the building of a new barn to be used in their haymaking activities.

Putting the (hay) cart before the horse

Babylon believed that it was in the business of making hay and also providing services to several other companies operated by its director/sole customer. However, the FTT concluded that only the haymaking activities were in fact carried out during the period under appeal, the other activities having ceased prior to that date.

Babylon applied some rather circular thinking and suggested that as only entities with business activities can be VAT registered, the fact they were VAT registered meant HMRC must agree that they have business activities. The FTT disagreed; as HMRC generally accept VAT registrations where the taxpayer states they are eligible to register. HMRC’s acceptance of that assertion doesn’t guarantee that HMRC would still allow the registration if it did a detailed review of the entity.

Babylon then switched tact and tried to say a VAT registration alone allowed the recovery of input VAT, so as HMRC had not cancelled the registration at that point, they were still entitled to recover the VAT paid. Again, the FTT dismissed this, as registration or not, recovery of input VAT still requires taxable (business) income to match the expenses to.

Was there even a business?

The remaining point considered by the FTT was whether Babylon was even carrying on a business. For this, the FTT considered the factors deemed to be of relevance in the case of Customs & Excise Commissioners v Lord Fisher [1981], specifically:

  1. Was the activity earnestly pursued?
  2. Was there a measure of substance?
  3. Was there reasonable continuity?
  4. Were the supplies made on sound business principles?
  5. Were supplies made for consideration?
  6. Were the supplies a type normally made for profit?

The FTT concluded that questions 1), 2), 3) and 6) were the case for Babylon. However, questions 4) and 5) were not, as the hay was grown on the customer’s land and the amount charged for it was a mere £500 per year.

A capital disposal was made during the period in question, but the FTT deemed this a one-off (and exempt) transaction and so disregarded it.

The FTT ruled that no business activity existed, therefore HMRC was correct to refuse the recovery of the input tax.

The upper tribunal

Babylon appealed to the UT. The company argued that with regard to whether there was a business, the approach that should have been used was that in Wakefield College v HMRC. HMRC agreed this was the case, but persisted that if the FTT had used Wakefield in place of Fisher, the same conclusion would have been reached.

The UT agreed that treating Fisher as an exhaustive list of conditions to be met was not the correct approach. They therefore set aside the decision reached by the FTT, but instead of remitting it back to them, the UT opted to remake the decision.


The only involvement the UT could find between Babylon and the haymaking was that Babylon owned the machines used. Babylon seemingly had no legal ownership of the hay, therefore it was not Babylon’s to sell.

There was no evidence Babylon ever tried to find new customers and the selling price was fixed by their sole customer.

Babylon did not raise invoices, did not hold insurance for its activities, and had a single customer which generated a very small amount of income.

Finally, the activities were not carried out on the general market, nor on general market terms.


The UT therefore reached the conclusion that no business activity was carried out for VAT, though by a different path to the FTT. The appeal failed.


It is vitally important that a business can demonstrate it is actively trading in taxable items should HMRC dispute its VAT status. Selling a product to a single, linked customer for a price below the market rate, and making no attempts to find more commercial customers, meant Babylon fell short of this requirement.

The fact both the FTT and UT reached the same conclusion from different angles speaks volumes.

Replies (3)

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By Hugo Fair
07th Dec 2021 17:53

A new example of 'straw man' reasoning?

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Replying to Hugo Fair:
paddle steamer
08th Dec 2021 12:10


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By Paul Crowley
07th Dec 2021 19:48

Both tribunals came to the same conclusion as quite rightly there was no business.
They "sold" Fred's stuff to Fred
The arguments used suggest that HMRC need to check Bona Fides of every trader
Not exactly reasonable

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