Babylon Farm Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Neutral Citation | [2021] UKUT 224 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 224 (TCC)
Mr Justice Snowden, Judge Thomas Scott
Value added tax – Disallowance of input tax – Whether HMRC required to deregister persons that have ceased to be registrable before disallowing input tax – No – Whether any business being carried on – No – Definition of economic activity – EC Directive 2006/112, art. 9(1) – Appeal dismissed.
The Upper Tribunal (UT) set aside the original FTT decision and remade it, dismissing the taxpayers appeal against the disallowance of input tax on the basis it was not carrying on an economic activity.
The UT set aside and remade the decision of the FTT in Babylon Farm Ltd [2019] TC 07356.
Babylon had incurred costs between May 2014 and February 2018, mainly in building a new barn to replace outbuildings it had sold. The barn was used to store equipment used in its haymaking activities. HMRC denied any input tax recovery on the grounds Babylon was not carrying on a business for VAT purposes in this period.
The FTT dismissed Babylon's appeal and decided;
- HMRC were not required to deregister Babylon before claiming it did not carry on a business for VAT purposes and;
- The input tax had been properly disallowed because Babylon was not, in fact, carrying on a business.
The UT had no hesitation in rejecting the appellant's submission that they were a taxable person because they were registered for VAT and if HMRC thought they had ceased to be registrable they should have deregistered them but, having failed to do so, they could not now deny them input tax.
The argument was misconceived since being registered for VAT did not confer an automatic entitlement to recover VAT as input tax, which was defined as VAT paid by a taxable person on certain goods or services used, or to be used, for the purpose of any business carried on by him.
The UT accepted the FTT had erred in its approach to the question of whether Babylon was carrying on a business or economic activity in applying the principles set out by the High Court in C & E Commrs v Lord Fisher (1981) 1 BVC 392 without considering the significant developments in case law discussed by the Court of Appeal in Wakefield College v R & C Commrs [2018] BVC 22 (Wakefield). They therefore set the decision on this issue aside and remade it, given there was no dispute as to the primary facts and they had sufficient information to determine the issue.
The UT applied the two-stage approach set out in Gemeente Borsele v Staatssecretaris van Financiën; Staatssecretaris van Financiën v Gemeente Borsele (Case C-520/14) [2016] BVC 18 (Borsele) and endorsed by Wakefield.
- Did Babylon make a supply of goods or services for consideration within the meaning of EC Directive 2006/112, art. 2?
- Were Babylon's supplies made for the purposes of obtaining income from them on a continuing basis? In other words, was there a direct link between the service supplied and the consideration received?
HMRC accepted the first condition was satisfied, and Babylon did make supplies for consideration.
It was also clear the activity had been carried out on a continuing basis, but it was not an economic activity. It was not conducted on sound and recognised principles. It was not even clear on what basis Babylon had title to the hay, which was grown on land that belonged to Mr McLaughlin, the co-owner and director of Babylon, or to Mr and Mrs McLaughlin. There was also no direct link between the activities and the income received which was not determined by either the value of supplies or by reference to the business costs. Other factors also pointed to the activities not being carried out for the purpose of obtaining income. Babylon had only one customer, did not raise any invoices, was not paid for several years and there was no evidence it had maintained any insurance in relation to its activities. Finally, Babylon was not a market participant.
The appeal was, therefore, dismissed.
Wakefield College v R & C Commrs [2018] BVC 22 is the leading authority in determining whether a person is carrying on an economic activity. The correct approach is set out in paras. 51–59 of that decision but, ultimately, each case requires a wide-ranging enquiry, examining all the objective circumstances in which the goods or services are supplied.
Hammad Baig, counsel, instructed by VATangles Consultancy, appeared for the appellant
Barbara Belgrano, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
[1] Babylon Farm Limited (“Babylon”) appeals against the decision of the First-tier Tribunal (the “FTT”) reported at [2019] TC 07356 (the “Decision”).
[2] The FTT dismissed Babylon's appeal against HMRC's decision to deny credit for certain input tax. The FTT decided that (1) HMRC were not required to deregister Babylon for VAT before claiming that it did not carry on a business for VAT purposes and (2) the VAT had been properly disallowed because Babylon was not in fact carrying on a business for VAT purposes.
[3] With the permission of the FTT as regards certain grounds and this Tribunal as regards the remainder, Babylon appeals against both decisions reached by the FTT.
[4] Babylon appealed to the FTT against two decisions of HMRC dated 11 May 2018 which denied a claim by Babylon to recover input tax of £19,760.50 (“the Input Tax Claim”) and reduced its claim for input tax to nil for the period from May 2014 to February 2018. HMRC denied the input tax credit on the basis that Babylon was not carrying on a business for VAT purposes in the relevant period (defined at [3] of the FTT decision as 05/14 to 05/17). Babylon claimed that it was carrying on a business, comprising the activity of selling hay to Mr McLaughlin, the co-owner and director of Babylon, and the provision of services in relation to certain other business activities carried on or to be carried on by Mr McLaughlin.
[5] The claims for input tax in the relevant period arose mainly from costs incurred by Babylon in building a new barn to replace outbuildings which it had sold and which was to be used to store equipment use by Babylon in carrying out its haymaking activities.
[6] Babylon had also challenged HMRC's decision to deregister Babylon for VAT purposes on the basis that it was not carrying on a business. HMRC agreed to continue the registration pending the conclusion of the appeal. Babylon argued that it was not open to HMRC to argue that a person registered for VAT was not carrying on a business, as HMRC needed to deregister that person before such a claim could be made.
[7] References below to paragraphs in the format [x] are, unless indicated otherwise, to paragraphs of the Decision.
[8] At [8] the FTT stated as follows:
8. The Tribunal understood the following facts to be agreed between the parties at the time of the hearing and found them to be supported by the evidence:
- The Appellant's only income during the relevant period arose from the sale of hay and amounted to £440 p.a.
- The only customer for the hay was Mr McLaughlin, who required it for his livery business.
- The Appellant had been registered for VAT since 1991 and had previously carried out more extensive farming activities whilst under the ownership of Mr McLaughlin and his wife.
- The Appellant had previously received management fees from successful businesses that Mr McLaughlin had owned and run.
- During the relevant period Mr McLaughlin was seeking to develop new businesses.
- The Appellant's claims for input tax during the relevant period arose mainly from the cost of building a new barn in order to replace the outbuildings sold by the Appellant. This new barn was used to store the equipment and machinery required to carry out the haymaking activities of the Appellant.
- The land on which the hay was grown belonged to Mr McLaughlin or to Mr and Mrs McLaughlin and not the Appellant.
- The Appellant owned and had control over some outbuildings on the farm occupied by Mr and Mrs McLaughlin. Mr and Mrs McLaughlin owned land and other buildings on the farm.
[9] In relation to Babylon's activities, the FTT found as follows, at [15]–[17]:
[15] It is agreed that the activities being carried out by the Appellant include the making of hay for re-sale to Mr McLaughlin and the sale of outbuildings. The Appellant argued that it was also undertaking preparatory acts for the new business activities that Mr McLaughlin was developing and that it would be able to levy management charges on these businesses once they were generating revenue. One new business activity was the creation of an investment and insurance product that would help to fund the care needs of older people. The other new business described by Mr McLaughlin was the provision of management and financing advice to small businesses. During the relevant period Mr McLaughlin was working on these two new business opportunities. It became clear from the evidence of Mr McLaughlin in the hearing and the submissions on behalf of the Appellant, that neither of these activities had yet resulted in any chargeable services being provided and that both were to be carried on through companies that had been formed for these purposes. In relation to the care funding activities Mr McLaughlin corresponded in the name of Investment in Care Ltd and contracted in that name. Mr McLaughlin's evidence at the hearing was that he had formed a new company, Babylon Farm Consulting Ltd, in order to pursue the consultancy activities. Both businesses remained at a formative stage and neither company has generated any revenue.
[16] The Appellant's activities during the relevant period in relation to these new business opportunities need to be assessed. The Tribunal was not made aware of any evidence that any service was provided at this time to either of the new companies or that preparatory acts were undertaken by the Appellant during the relevant period in...
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Babylon Farm Ltd v The Commissioners for HM Revenue and Customs [2021] UKUT 0224 (TCC)
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