Argument for VAT recovery on purchased Single Farm Payment Entitlements upheld

A recent case in the Court of Session in Edinburgh has found in favour of an Aberdeenshire farming business against HMRC.

Frank Smart & Son Ltd had argued that the VAT incurred on the purchase of Single Farm Payment Entitlement (SFPE) units was for the purpose of securing a source of income to raise capital for the farming business and a future renewables enterprise and, as both of these were economic activities for VAT purposes, the VAT incurred should be recoverable.

HMRC conversely had argued that the purchase of SFPE units had a direct and immediate link with the income generated from SFPE units which, as this was not an economic activity giving rise to taxable supplies, would mean the VAT incurred on their purchase was not deductible.

The Court of Session found however that whilst financial transactions were generally exempt from VAT, and no VAT was normally incurred, because the transactions in question were designed to provide finance for the business and its expansion, there was no reason in principle why VAT incurred on their purchase should not be deductible.

The Court found that the SFPEs were an input to the taxpayer’s business, their cost forming a part of its general overheads and, where used to fund expansion and diversification, they were a component part of the price of the taxpayer’s product.

Sean McGinness, director, VAT at Chartered Accountants Saffery Champness and a member of the firm’s Landed Estates and Rural Business Group, said: “HMRC had dismissed the intentions of the taxpayer as being relevant to the issue of VAT recovery – a position that the Court of Session firmly rejected, finding rather that the taxpayer had clear and well documented plans for using the income from the SFPEs to finance expansion of its taxable business activities, creating a direct and immediate link between the VAT to be recovered on the SFPEs purchased and the taxable activities of the business.

“Any business that embarks on a new taxable activity from which income may not be generated for some time would be wise to document their intentions clearly in meeting minutes, business plans and similarly documentation to support recovery of VAT on the associated costs.”