A recent case in the UK Supreme Court could support farmers trying to recover VAT from HM Revenue & Customs (HMRC) after the Court ruled that the business challenged by the taxman was entitled to VAT recovery.
Scottish farmer Frank Smart, who also runs another farm leased to Frank A Smart and Sons Ltd (FASL), won his case over a £1 million VAT bill imposed by HMRC after he tried to deduct VAT of more than £1 million, which HMRC tried to impose as Mr Smart made 34,477 units of Single Farm Payment (SFP) for around £7.7 million between 2007 and 2012.
HMRC refused the business trying to deduct VAT on its returns because there was a direct link between the purchase of the entitlements and the receipt of the subsidy.
The taxman argued that, as the subsidy was outside the scope of VAT, Mr Smart could not prove that the input tax was linked to a VAT-able output.
However, while the Supreme Court agreed that the appeal was related to “an interesting business model”, it ruled that the business was entitled to VAT recovery, as the subsidies FASL had received were “cost components of its economic activities” because the entitlements were bought to help fund “current and planned economic activities”, namely farming and the construction of a wind farm.
This was the third time the case had come to court, first in a First-Tier Tribunal (FTT) and then at the Inner House of the Court of Session, even though both previous courts had ruled against HMRC.
As one commentator remarked, the outcome of the case meant that all farmers would “dodge a bullet”, as HMRC would find it more difficult to restrict VAT recovery following the case.