HMRC has lost a legal appeal to stop an Aberdeenshire farming business reclaim VAT of more than £1m on its purchase of rights to a subsidy scheme for farmers in the European Union.
The farm, Frank A Smart & Son Limited, said that the assets it bought, the Single Farm Payment Entitlement (SFPE), which is a tradeable asset, would be used to fund its business and were therefore a valid business expense.
In the upper-tribunal case (HMRC v Frank A Smart & Son, UKUT 0121) the farm cited the Abbey National and Kretztechnik VAT legal cases which it said established the principle of neutrality required incidental costs to be regarded as overheads of, and therefore cost components of the business generally.
The fact that the cost of the SFPE units would, economically, be recouped from the annual receipts of Single Farm Payment schemes rather than from sale of farm produce or electricity was irrelevant, the farm argued.
HMRC, however, argued that the units had been bought for the purpose of obtaining an agricultural subsidy and that this was a “non-economic activity outside the scope of VAT”.
It also argued that first-tier tribunal had erred in law when it ruled that there was a direct and immediate link between the cost of acquiring the SFPE units and the company’s taxable economic activity so as to entitle the business to a deduction of input tax.
Lord Tyre rejected HMRC’s appeal. “Once the cost was found to be for the benefit of the company’s taxable activity – as the [first tier tribunal] found – it fell to be treated as a cost component of the business’s taxable supplies,” he said.