In Babylon Farm Ltd v HMRC [2021] UKUT 0224 (TCC), the taxpayer carried on a farming business and had been registered for VAT since 1991. By the time to which the appeal related, the only remaining activity was the sale of hay grown on land belonging to the taxpayer's directors to one sole customer (one of the directors), generating £440 per year.

The taxpayer claimed to recover input VAT, principally on the cost of a new barn to store machinery to make the hay. HMRC disallowed the claim on the ground that the taxpayer was no longer carrying on a business, but did not cancel the taxpayer's VAT registration pending determination of the appeal. The taxpayer appealed to the FTT on the grounds that (i) it was carrying on a business; and (ii) it was not open to HMRC to deny it credit for input tax (on the basis that the taxpayer was not carrying on a business) without first cancelling its VAT registration.

The FTT, applying the test in C&E Comrs v Lord Fisher [1981] STC 238, held that the taxpayer had not been operating a business during the years in question, as the activities carried on had not followed sound and recognised business principles and nor was it predominantly concerned with the making of taxable supplies for consideration. The FTT also rejected the contention that HMRC had to cancel the taxpayer's registration before denying credit for input tax. The FTT therefore dismissed the taxpayer's appeal. The taxpayer appealed to the UT, on the grounds that the FTT had made errors of law in concluding that it had not been carrying on a business or economic activity. The taxpayer argued that the FTT had failed to take into account the EU legislation underlying the UK's implementation in Value Added Tax Act 1994 (VATA 1994) and applied the wrong tests when determining whether a business was being carried on. In addition, the taxpayer repeated its arguments relating to deregistration.

The UT dismissed the taxpayer's appeal.

On the issue of whether the taxpayer was in business, the UT held that the FTT should have applied the test enunciated in Wakefield College v HMRC [2018] EWCA Civ 952, rather than relying on the Lord Fisher decision as an 'exhaustive checklist'. The UT decided to re-make the FTT's decision on the point rather than remit the case back to the FTT. The UT held that the taxpayer was not carrying on an economic activity as there was no direct link between the services supplied by the taxpayer and the payment received for them, the haymaking was not being carried on in a regular manner and on sound business principles (the taxpayer raised no invoices, had only one customer worth £440 per year and maintained no insurance), and the taxpayer did not participate in the market.

With regard to the deregistration issue, the UT had little difficulty in rejecting the taxpayer's arguments. In the UT's view, paragraph 13(2), Schedule 1, VATA 1994, gives HMRC a discretion to cancel a registration and not an obligation to do so. Status as a taxable person did not carry an automatic right to deduct income tax regardless of whether a business was being carried on. If a business was not being carried on, or to be carried on, the VAT was not input tax at all (due to the definition in section 24(1), VATA 1994, which defines input tax by reference to goods or services used or to be used for the purposes of a business to be carried on by the taxpayer).

Why it matters: This decision provides useful guidance from the UT on the appropriate test to be applied in assessing whether a taxpayer is in business and therefore can reclaim input VAT.

The decision can be viewed here.