In HMRC v Frank A Smart & Son Ltd [2019] UKSC 39, the Supreme Court has held that a farming company was entitled to repayment of input VAT charged on its acquisition of single farm payment entitlement units which were related to its overall economic activities and future taxable supplies.

Background

Frank A Smart & Son Ltd (FASL) is a Scottish company which runs a farming business in Aberdeenshire. It produced beef cattle and crops, which were taxable. FASL received single farm payments (SFP) from the Scottish government. SFPs were agricultural subsidies which between 2005 and 2014, were paid to farmers who had eligible land at their disposal on 15 May of each year and who met certain other requirements. When the scheme was initiated in 2005, farmers in the UK were allocated initial units of entitlement to single farm payments (SFPEs) for no consideration. The SFPEs were tradeable and a market in them developed.

FASL took advantage of the market in units of SFPEs to accumulate a fund for the development of its business. With the assistance of bank funding, it spent some £7.7m on purchasing units (in addition to its initial allocation).

FASL claimed repayment of VAT, amounting to £1,054,852, which was paid on its purchase of 34,477 units of SFPEs. HMRC refused the claim and FASL appealed.

The issue before the First-tier Tribunal (FTT) was whether FASL was entitled to deduct the input tax incurred on purchasing the units. The FTT concluded that the purchase of the units was a funding exercise for the purpose of the farming business and was not a separate business activity. The FTT held that there was a direct and immediate link between the expenditure and FASL’s future taxable supplies and allowed the appeal.

HMRC appealed to the Upper Tribunal, who dismissed its appeal. HMRC then appealed to the Inner House of the Court of Session. The Inner House also dismissed HMRC’s appeal. HMRC then appealed to the Supreme Court.

The central question in the appeal was whether the receipt of the SFPs, which were transactions outside the scope of VAT, prevented FASL from deducting VAT which it had paid on the purchase of the SFPE units.

Supreme Court judgment

The appeal was dismissed.

The Supreme Court reviewed relevant EU case law on input tax recovery, and in particular Abbey National (C-408/98), Kretztechnik (C-465/03) and Securenta (C-437/06). The Court confirmed that these cases are authority for the proposition that a taxable person who acquires professional services, for an initial fund-raising transaction which is outside the scope of VAT, is not prevented from deducting the corresponding input tax, provided “its purpose in fundraising, objectively ascertained, was to fund its economic activity and it later uses the funds raised to develop its business of providing taxable supplies”.

In the view of the Court, there was objective evidence that FASL, when carrying out its fund-raising activity, was carrying out a taxable business and contemplating using the funds raised on three principal developments, namely, a windfarm, the construction of further farm buildings and the acquisition of neighbouring farmland. There was no basis for distinguishing expenditure incurred in a fund-raising exercise which takes the form of a sale of shares from a fund-raising exercise that involves the receipt of a subsidiary over several years. In the view of the Court, the FTT was entitled to conclude that FASL had acted as a taxable person when it had purchased the units.

Comment

The FTT made some important findings of fact which, ultimately, had a bearing on the outcome of this appeal. The FTT’s findings of fact led the Supreme Court to conclude that VAT incurred by FASL, a fully taxable business, on the cost of finance was recoverable.

The Court commented that: “The recognition that fund-raising costs may, where evidence permits, be treated as general overheads of a taxable person’s business means that the taxable person must be able to provide objective evidence to support the connection between the fund-raising transaction and its proposed economic activities”.  If such objective evidence cannot be provided, HMRC has power to charge VAT under the VAT (Supply of Services) Order, SI 1993/1507, reg 3. This is consistent with what the CJEU recorded in Sveda (C-126/14) – the taxpayer has to repay input VAT if it does not use the goods or services for the purposes of its economic activity.

As a result of this decision, it is likely that HMRC will carefully scrutinise the subsequent use of raised funds and closely examine the available evidence of the connection between the fundraising and the proposed business activities.

The judgment can be viewed here.