Farmers can reclaim VAT against entitlements, court case finds

Farmers should continue to be able to reclaim VAT against purchases of BPS entitlements, following an appeal by HMRC.

In an appeal against farmer Frank Smart, HMRC argued the VAT incurred on the purchase of his BPS entitlements had a direct and immediate link to the subsidies which the taxpayer earned as a result.

But the appeal was rejected by the Court of Session in Scotland, relying on a line of cases decided by the European Court of Justice.

While all parties agreed subsidies were outside the scope, the key test was how the income from those subsidies was to be used.

See also: What the EU agreement on citizens’ rights means for farmworkers

Taxable farming activities

Frank Smart, a farmer of Frank Smart & Son, invested his income in his taxable farming activities, including construction of new cattle sheds and wind turbines to generate electricity for the national grid. 

Mr Smart was advised by Glyn Edwards, VAT director at MHA MacIntyre Hudson. 

Mr Edwards said: “If HMRC’s argument had succeeded, a very large number of farms could have faced assessments from the VAT Office. 

“The case also undermines HMRC’s current attack on businesses profiting from the Renewable Heat Incentive (RHI).

“The objective of the scheme was to encourage businesses to install devices such as biomass boilers and heat pumps, with the promise of subsidy as renewable energy was produced.

“HMRC has argued the capital expenditure on the energy equipment has a direct and immediate link to the receipt of subsidy, but the judgement in Frank Smart demonstrates a wider view must be taken.

“If the subsidies are invested in ongoing taxable activities, then no input tax restriction should apply. 

“It is always worth looking beyond the immediate and understanding how income is used, before reaching a conclusion on input VAT recovery.” 

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