In HMRC v Frank A Smart & Son Ltd (Respondent) (Scotland) [2019] UKSC 39, the Supreme Court upheld the decisions of all earlier courts and dismissed HMRC's continued appeal: a company was entitled to a repayment of VAT paid when acquiring Single Farm Payment (SFPE) units as a fund raising exercise.
The taxpayer was a farming company which was entitled to SFPE units under EU agricultural policy.
A market developed in trading these subsidies and the company purchased extra 34,477 SFPE units and reclaimed over £1m in VAT in respect of their cost.
- It intended to use the income arising from the units to settle its overdraft and develop their business, repay it overdraft, develop a windfarm, improve its property and acquire neighbouring farms.
- The company was able to evidence its plans for development in the form of preliminary investigations, planning applications and site preparation works for a new cattle court.
- HMRC refused the input VAT repayment claim and the company appealed to the First Tier Tribunal (FTT).
The arguments put forward by HMRC were that:
- The SFPE units were acquired for the purposes of obtaining the income from them.
- This is a non-economic activity outside the scope of VAT.
- There is no link between the cost of acquiring the units and the company’s taxable activities that would allow a deduction of the input VAT.
The (FTT) allowed the company’s appeal, finding that:
- The purchasing of the SFPE units was not a separate business activity but a wholly integrated feature of the farming enterprise.
- The company’s evidence that the money was being used to develop the farming activities supports the link between the acquisition of the SFPE units and future taxable supplies.
HMRC appealed to the UT, who dismissing HMRC’s contention that the FTT had erred in law in finding there was a link between the acquisition and the company’s taxable supplies:
- In this case, the input VAT is not connected with a particular supply: the receipt of income from the units not being related to a supply of goods or services.
- It must therefore be considered whether the cost is incurred for the purposes of the company’s economic activity in general.
- If so, it must be considered part of the company’s overheads and is a cost component of the company’s products, all of which are taxable.
- This is sufficient to establish a link between the cost and the taxable supply and allow all of the input VAT to be reclaimed.
Court of Session
HMRC appealed to the Court of Session. The Court agreed with the FTT and UT:
- There is no reason why VAT incurred in relation to transactions which are designed to provide finance for the business should not be deductible merely because financial services themselves are exempt.
- Although the use of SFPEs as a source of finance is unusual, that does not mean it cannot be seen as a method of raising finance.
- The receipt of income from the SFPE's is merely a consequence of the acquisition and not a separate business activity distinct from the taxpayer's general business.
Supreme Court
HMRC then appealed to the Supreme Court, which upheld the judgments of the earlier courts. In an unanimous verdict, the court decided that:
- In order to deduct input VAT there must be a direct and immediate links between goods and services acquired and
- the taxable supplies made, or
- the whole of the taxable person’s economic activity because their cost forms part of that business’s overheads and thus a component part of the price of its products.
- Input VAT may be deducted when charged on professional services acquired in raising funds to develop its business in providing taxable supplies, or apportioned if the taxable supplies are mixed (exempt, out of the scope of VAT etc).
- The right to deduct VAT arises when VAT on the services becomes chargeable and not when any resulting taxable supplies are made.
- The purpose of the fund raising activity and its link to the person's taxable activity is a question of fact and must be assessed in the light of all the circumstances of the case.
External links
HMRC v Frank A Smart & Son Ltd (Respondent) (Scotland) [2019] UKSC 39
HMRC v Frank A Smart & Son Limited [2017] ScotCS CSIH 77
HMRC v Frank A Smart & Son Ltd [2016] UKUT 0121