HMRC Lose VAT Battle as Farmers Dodge a Bullet

25 September 2019

A Scottish farm business has won its battle against HMRC, enabling it to reclaim VAT payments worth more than £1m.

The UK Supreme Court ruled in favour of Frank A Smart & Son Ltd after HMRC initially refused to let the company reclaim VAT incurred on the purchase of over 34,000 units of Single Farm Payment Entitlement.

Aberdeenshire-based Mr Smart already owned and ran Tolmauds Farm, a farm of about 200ha, but he purchased extra Entitlements to take advantage of rules enabling claimants to lease land on which they claim Entitlements, without the need to physically farm it.

HMRC had already been ruled against at the First-Tier Tribunal and the Inner House of the Court of Session and was similarly ruled against at the third hurdle. HMRC had refused the VAT repayments on the grounds that there was a direct link between purchasing the Entitlements and the receipt of the subsidies. They argued that as the subsidy was outside the scope of VAT, the claim failed as it was not linked to a VATable output.

The Supreme Court noted it was ‘an interesting business model’ ruling that the business was entitled to recovery of the VAT. They stated that the subsidies received were ‘cost components of its economic activities’ as the Entitlements were bought to help fund ‘current and planned economic activities’, namely farming and the construction of a windfarm.

By establishing that subsidy has no role to play in determining VAT recovery, the Court has asserted an important principle that should help protect the true value of subsidy post Brexit.

Had HMRC had won their argument, every business in receipt of subsidy could have been subjected to restricted VAT recovery.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

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