In Babylon Farm Ltd v HMRC [2019] TC7356  a company that produced hay and maintained outbuildings on its owners' land was not found to be running a business for VAT and a £19k input VAT claim was disallowed.

  • The company produces hay and maintains outbuildings on a farm owned by its director and only customer Mr McLaughlin.
  • It reclaimed input VAT of £19,765 with a taxable turnover from hay sales of just £440.
  • No VAT invoices had been issued by the company to Mr McLaughlin and no payment had been received from him and there was no contract was in place for the supply of hay.
  • HMRC denied the claim on the basis that the company’s activities were so small and had insufficient substance to constitute a business venture.
  • The Appellant appealed, stated that it was entitled to recover the amount of VAT it had incurred principally on building a new barn. 

The First Tier Tribunal (FTT) considered whether or not the Appellant was engaged in economic activity and operating as a business during the relevant period.

In considering the factors, see Starting in business: VAT am I trading? 

It found that:

  • The activities being carried out included the making of hay for re-sale and the sale of outbuildings.
  • The company argued that it was also undertaking preparatory acts for the new business activities although no evidence of this was provided.
  • Whilst the company owned its own bailer, it was operating on land owned jointly by the director and his wife and providing hay for their livery business.
  • The sale of the outbuildings was clearly a one-off capital transaction. It was a VAT exempt transaction.

The company's appeal was dismissed: HMRC were correct to disallow the input tax claimed.

Useful guides on this topic

Starting in business: VAT am I trading? 

What goes into a valid VAT invoice?

Is it a trade, a business, or an investment activity?
A very handy guide comparing the different tax issues for different types of activity.

External links

Babylon Farm Ltd v HMRC [2019] TC7356 

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