A Scottish farmer has been victorious at the Supreme Court (SC). The farmer had purchased Single Farm Payment Entitlements (SFPE) and had incurred VAT of over £1m when purchasing these units.
SFPE were established by the EU as a means of providing subsidies to farmers. When the scheme was established farms that met certain conditions were allocated units for no consideration. A market developed in the trade of the units so other people could become entitled to the future subsidies. The taxpayer in this case purchased many of these units and held that the input tax was deductible as the future subsidies would be used in contemplation of future economic activity. The farmer held that this future economic activity would be a taxable activity and therefore he had a right to deduct the input tax from his output tax and request repayment where the input tax was greater than overall output tax.
HMRC had disagreed and refused to repay the £1m. The taxpayer took the case to the First-tier Tribunal who allowed the appeal and found for the taxpayer. The Upper Tribunal and Inner House also sided with the taxpayer and dismissed HMRC’s appeals. The SC has now finally put the case to bed in favour of the taxpayer.
The SC confirmed that VAT on fund-raising activities is deductible where the “purpose of fund-raising, objectively ascertained, was to fund its economic activity and it later uses the funds raised to develop its business of providing taxable supplies”. As the purchase of the SFPE was a fund-raising activity then the input tax on the acquisition of the SFPE units was deductible.
The SC held that there can naturally be a time lapse between fund-raising activities and future economic activity but this time lapse does not permit the input tax to be withheld from the taxpayer. This also applied where due to circumstance outside of the control of the taxpayer the future economic activities did not in fact arise.
The decision can be found at: Commissioners for Her Majesty’s Revenue and Customs (Appellant) v Frank A Smart & Son Ltd (Respondent) (Scotland) – The Supreme Court
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