HMRC loses £1m VAT case against Scottish farmer

Supreme Court

HMRC has lost a £1m VAT case on appeal at the Supreme Court against a Scottish farmer over the purchase of farm subsidy entitlements

In a judgement issued on 29 July, the court said taxpayers can deduct VAT incurred in purchasing the rights to a subsidy, in this case entitlements to Single Farm Payments (SFPs).

HMRC had refused to allow the farmer, Frank A Smart & Son Ltd (FASL), to deduct VAT of £1,054,852 in its returns between December 2008 and June 2012, arguing that the subsidy was unrelated to the creation of non-exempt supplies. FASL appealed to the First Tier Tribunal (FTT) which ruled in its favour, finding that FASL intended when it purchased the entitlements to use the income from them to pay off its overdraft and develop the business.

SFPs were agricultural subsidies given to farmers who met certain conditions between 2005 and 2014. They were tradeable, and between 2007 and 2012 FASL spent £7.7m buying 34,377 units to top up its allocation of 194.98 units. It paid VAT on the units which it sought to reclaim on its VAT returns.

HMRC argued that the purchase of the units constituted a separate business activity, but the FTT found that the purchase of the units was ‘a wholly integrated feature of the farm enterprise’.

HMRC appealed to the Upper Tribunal which refused it and to the Inner House of the Court of Sessions which dismissed the appeal. HMRC then appealed to the Supreme Court which was unanimous in rejecting HMRC’s case.

Lord Hodge said that FASL acquired the SFP entitlements in support of its economic activities and on that basis was entitled to an immediate and ongoing right to deduct the VAT as long as it did not later carry out downstream non-economic activities or exempt transactions. Should that change in future, FASL might be liable to repay a proportion of the VAT.

The court said there must be evidence of a link between the acquisition of the SFPs, classed as a fundraising activity, and taxable activity which must be assessed objectively on the content of the transaction. ‘This is a question of fact which must be assessed in the light of all the circumstances of the case, including the nature of the asset concerned and the period between its acquisition and its use for the purposes of the taxable person’s economic activity,’ Lord Hodge wrote.

The court added: ‘There was objective evidence that FASL when carrying out its fundraising activity was carrying out a taxable business and was contemplating using the funds raised on three principal developments – a windfarm, the construction of further farm buildings and the acquisition of neighbouring farmland.’

Frank A Smart & Son Ltd was advised by Glyn Edwards, VAT director at MHA MacIntyre Hudson. The company was represented by Scottish Advocate David Small. Edwards commented, ‘If HMRC had won, every business in receipt of subsidy could have been subject to a restricted right of VAT recovery. The Supreme Court’s judgment suggests that if it can be shown the purpose of incurring costs goes beyond the immediate non-VATable supply, for example in order to generate funds to expand a taxable business, then some VAT recovery is possible. This is a significant development in the VAT landscape.’

Edwards added that the case was particularly relevant to the charity sector given the recent decision of the Court of Justice of the EU (CJEU) in University of Cambridge v Revenue and Customs Commissioners (C-316/18). ‘HMRC would have taken that judgment as a green light to refuse VAT recovery on any fundraising activity of a charity irrespective of how those funds are to be used,’ he said.

Graham Elliott, director of City and Cambridge Consultancy, told Accountancy Daily he wasn’t surprised at the Supreme Court’s decision ‘given HMRC’s lack of success with this case to date’.

He said: ‘HMRC’s motive in taking it can only really be explained by its historical attachment to the notion that the receipt of outside scope income must imply the carrying out of “non-business activity”.  That has never been supported by the courts.’

‘The facts showed that the farmer used the money to invest in commercial ventures such as acquiring farm land and developing a wind farm,’ Elliott said, adding that precedents such as the Sveda and Kretztechnick cases handed down by the CJEU clearly show that costs like these are linked to downstream business activity.

‘The clarity of the jurisprudence allowed the Supreme Court to reject HMRC’s request that the matter be sent to the CJEU for their guidance,’ Elliott said. ‘The judge did not give even a hint of temptation to make that CJEU reference.’

He added: ‘It is a pity for the farmer involved that it took a series of court appearances to reach the correct, and predictable, answer.’

An HMRC spokesperson said: ‘We’re disappointed with this decision and we are considering the terms of the judgment and its implications.’

The Supreme Court declined to send the FASL case to the CJEU.

Tom Reeve | 30-07-2019

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