31 January 2018
Can VAT charged on an asset that gives rise to non-taxable income be reclaimed by the purchaser? In Frank A Smart & Sons Ltd  CSIH 77 the trader thought it could, however HMRC did not.
Frank A Smart & Sons Ltd (Smart) is a farming company which bought some Single Farm Payment Entitlements (SFPEs), rather a lot of them 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 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 way in which the income was put to use.
Smart had invested in new buildings on the farm to be used in taxable farming activities and in wind-turbines to sell electricity to the National Grid, also a taxable 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.
Whilst there will be many relieved farming businesses, the ripples from this decision extend beyond the agricultural community. The principle can be used to resist HMRC attempts to deny input VAT recovery in respect of acquisitions that give rise to the receipt of grants and subsidies which are outside the scope of VAT. Examples of this include HMRC trying to refuse input VAT repayments in respect of biomass boilers and heat pumps, which qualify for support under the Government’s Renewable Heat Incentive. If the subsidy received is invested in a taxable activity, input VAT should be recoverable.
Once the principle is grasped, a number of possibilities arise. Could input VAT on investment management fees that give rise to income that is exempt or outside the scope of VAT be recoverable where that income can be shown to be applied to a taxable purpose? Some not-for-profit bodies generate investment income which may be used in a taxable endeavour, but no input VAT is recovered on the costs of achieving that income. In the right circumstances a re-think may be appropriate.