Sean McGinness

In Babylon Farm Limited (Babylon Farm Ltd v Revenue and Customs [2021] UKUT 224 (TCC), the Upper Tribunal concluded, agreeing with the earlier First Tier Tribunal (FTT) decision and HMRC, that the company was not undertaking an economic activity, and therefore the VAT incurred, principally on the construction of a new barn, was not recoverable and the company actually had no entitlement to be registered for VAT.

Babylon Farm maintained that it was carrying on the business of haymaking (with the hay being sold to a Director/Shareholder, who actually owned the land on which the hay was grown for use in their livery business) and business consultancy.

The Upper Tribunal found no evidence of the company undertaking either activity.

The business tests from the High Court decision in Lord Fisher (1981) are well known, are widely applied, and form the basis for HMRC’s guidance on what constitutes a business activity.

More fundamentally however the case of Babylon Farm Ltd has highlighted that activities that are not conducted on sound and recognised business principles or that are not predominantly concerned with the making of taxable supplies for consideration, do not constitute a business for VAT purposes.

This case is a reminder that HMRC does challenge taxpayers where an activity does not appear to be undertaken in a manner consistent with basic business principles. High costs being incurred without similarly high income being generated in return will certainly give HMRC an indication that there is possibly no economic activity present.

Farming and rural businesses, in particular, should be mindful of cost-intensive activities which yield little to no taxable income, as reclaiming VAT may not be possible in those circumstances.