HMRC outsmarted on VAT-able farming activities

22 January 2018

Can VAT charged on an asset that gives rise to non-VAT-able income be reclaimed by the purchaser?  In Frank A Smart & Sons Ltd [2017] CSIH 77 the trader thought it could, but HMRC thought it couldn’t.

Frank A Smart & Sons Ltd (Smart) is a farming company which bought some Single Farm Payment Entitlements (SFPEs), rather a lot, in fact; 34,477 units.  In buying those units just over £1 million in VAT was paid, which Smart wanted to reclaim, but HMRC did not want to repay.

HMRC’s argument was that, as the SFPEs gave rise to subsidies, which were income outside of the scope of VAT, no input VAT was recoverable.  There was no disagreement that subsidies are outside the scope of VAT, but the counter argument from Smart referred to a series of the cases in the European Court of Justice and advanced the idea that it was necessary not to look at the income that arose immediately, but to look beyond that to see the use to which the income was put.

Smart had invested in new buildings on the farm to be used in VAT-able farming activities and in wind-turbines to sell electricity to the National Grid, also a VAT-able activity.  Accordingly, it was argued, the expense of obtaining the subsidies was an overhead of Smart’s overall business and the input VAT could be reclaimed.  The Scottish Court of Session agreed with Smart.

HMRC has long been challenging the reclaim of input VAT on the acquisition of SFPEs and success for HMRC could have led to many farming businesses facing HMRC assessments for VAT.  There may also be farmers who have chosen not to dispute HMRC challenges on this front and may be able to re-visit the situation in the light of this case.

If you have any concerns about whether or not you are reclaiming the right amounts of input VAT, or if you would like to discuss the accounting services that we can provide for your rural or agriculture business, please contact one of our specialists at your nearest location, or complete the contact form.