UK Supreme Court dismissed HMRC appeal on VAT repayment for EU farm subsidy purchase

The justices unanimously dismissed an appeal HMRC after ruling that when the respondent incurred the costs of the single farm payment entitlement (SFPE) units, it was acting as a taxable person because it was acquiring assets in support of its current and planned economic activities, namely farming and the windfarm, and was therefore entitled to deduction of the VAT paid on the purchase of the SFPE units.

Deputy President Lord Reed, sitting with Lord Wilson, Lord Hodge, Lord Briggs and Lady Arden, heard that the respondent, Aberdeenshire-based Frank A Smart & Son Ltd (FASL), claimed repayment of VAT paid on its purchase of 34,477 units of single farm payment entitlement (SFPE).

The units were issued by the Scottish Government in accordance with the European Union Single Farm Payment (SPF) scheme and were tradeable.

The purchase of the units entitled taxpayers to obtain benefits under the scheme on fulfilling specified conditions.

FASL spent about £7.7m between 2007 and 2012 on purchasing 34,377 SFPE units in addition to its initial allocation of 194.98 units for Tolmauds Farm.

During this period FASL paid VAT on the SFPE units which it purchased and it has sought to deduct or claim repayment of that VAT as input tax.

But HMRC refused to allow the taxpaying company to deduct VAT of £1,054,852.28 in its returns between December 2008 and June 2012.

FASL appealed to the First-tier Tribunal (FTT), which allowed the appeal having found that, when it purchased the SFPE units, FASL intended to apply the income which it received from the SFPs to pay off its overdraft and to develop its business operations.

FASL was also contemplating three principal developments of its business, including establishing a windfarm, constructing further farm buildings and purchasing neighbouring farms.

Based on those findings, the FTT concluded that the funding opportunity afforded by the purchase of the SFPE units did not form a separate business activity of FASL but was “a wholly integrated feature of the farming enterprise”.

HMRC appealed unsuccessfully to the Upper Tribunal and then to the Inner House of the Court of Session, and now the UK Supreme Court has also dismissed its appeal.

Giving the judgment with which the other justices agreed, Lord Hodge said: “While it is not clear from the FTT’s findings when any of FASL’s projects will come to fruition, I am persuaded that the FTT was entitled to conclude that FASL when it incurred the costs of the purchase of the SFPE units was acting as a taxable person because it was acquiring assets in support of its current and planned economic activities, namely farming and the windfarm. On that basis FASL was entitled to an immediate right of deduction of the VAT paid on the purchase of the SFPE units and is entitled to retain that deduction or repayment so long as it uses the SFPs which it received as cost components of its economic activities.

“A start-up business can acquire goods and services to support its future taxable supplies and claim VAT paid on those acquisitions as input tax; so too in principle can an existing business which proposes to expand its economic activity. On the facts found, FASL does not carry out and does not propose to carry out downstream non-economic activities or exempt transactions. Therefore, no question of apportionment … arises.”