Commissioners for HM Revenue and Customs v Frank a Smart & Son Ltd
| Jurisdiction | Scotland |
| Judgment Date | 08 December 2017 |
| Neutral Citation | [2017] CSIH 77 |
| Date | 08 December 2017 |
| Docket Number | No 15 |
| Court | Court of Session (Inner House) |
Extra Division
Upper Tribunal (Tax and Chancery Chamber)
Revenue — Value added tax — Input tax — Taxpayer charged VAT on acquisition of Single Farm Payment Entitlements — Payments intended to be invested in business — Whether VAT deductible as input tax — Value Added Tax Act 1994 (cap 23), sec 24
Article 168 of Council Directive 2006/112/EC on the common system of value added tax ([2006] OJ L347/1) (‘the Principal VAT Directive’) provides, inter alia, “In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled … to deduct the following from the VAT which he is liable to pay: (a) the VAT due or paid … in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person”.
Section 24 of the Value Added Tax Act 1994 (cap 23) provides, inter alia, “(1) Subject to the following provisions of this section, ‘input tax’, in relation to a taxable person, means the following, that is to say– (a) VAT on the supply to him of any goods or services; … being … goods or services used or to be used for the purpose of any business carried on or to be carried on by him.”
A farming company purchased a large number of Single Farm Payment Entitlement (‘SFPE’) units through loan finance. They were charged VAT on these purchases. The farming company ensured it always held sufficient hectares of land to exceed the number of SFPE units. As a result, the farming company received substantial amounts of EU Single Farm Payments (‘SFPs’). The farming company had used the SFPs to pay down its overdraft, and intended to use them in the future to fund construction and potentially for acquisition of neighbouring farms. The company claimed repayment of the VAT on the SFPEs as input tax. HMRC rejected the claim. The company appealed to the First-tier Tribunal (‘FTT’).
The farming company argued the purchase of the SFPEs was for the purpose of raising capital to meet the requirements of its business and future developments. The raising of capital in this way was a general overhead of the farming company's business and the VAT charged thereon fell to be treated as input tax. HMRC argued that the company was engaged in an extensive business of trading in SFPE units, which was not an economic activity for VAT purposes. They argued that, on an objective analysis, the purchase of the SFPEs was directly and immediately linked only to the receipt of SFP income. They argued that the company's ultimate intention as to use of the SFPs was irrelevant. The farming company's appeal was upheld by the FTT and subsequently by the Upper Tribunal (‘UT’). HMRC appealed to the Court of Session.
Held that: (1) the farming company was a taxable person carrying on an economic activity in the form of its farming business, which was not an exempt supply for VAT purposes; the purchase of SFPEs was a supply of services to the farming company; and the receipt of SFPs was not an economic activity or a making of supplies; these factors were important elements in the proper analysis of the transactions relating to the SFPE units (para 3); (2) VAT on an input transaction was deductible only if there was a direct and immediate link between it and the output transaction said to give rise to a right of deduction, the link was broken if the goods or services obtained were used for purposes of an exempt transaction or one that did not fall within the scope of VAT, but the link was not broken if the goods or services formed part of the general overheads of the taxpayer's business in such a way that they formed component parts of the price of the taxpayer's product (paras 19, 20); (3) while most transactions to secure finance for a business were exempt from VAT, the cost of services involved in raising such finance was subject to VAT and there was no reason in principle why such VAT should not be deductible as input tax (paras 21, 22); (4) the acquisition of the SFPEs was to finance development and diversification of the farming company's business and, therefore, forming part of the general overheads of its business, there was no business activity beyond providing additional finance (paras 25, 27); and appeal refused.
Observed that at the point when any funds were used for non-business purposes, including a dividend or other return to directors or shareholders, a charge to VAT would arise under reg 3 of the VAT (Supply of Services) Order 1993 (SI 1993/1507) (para 29).
Skatteverket v AB SKF (C-29/08) [2009] ECR I-10413, Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’, Sofia v Iberdrola Inmobiliaria Real Estate Investments (C-132/16) [2017] BVC 39 and Vehicle Control Services Ltd v Revenue and Customs Commissioners[2017] STC 11commented upon, Securenta Goettinger Immobalienanlagen und Vermoegensmanagement AG v Finanzamt Goettingen (C-437/06) [2008] ECR I-1597 and Vereniging Noordelijke Land-en Tuinbouw Organisatie v Staatssecretaris van Financien (C-515/07) [2009] ECR I-839distinguished, Odvolací Finanční Ředitelství v Baštová (C-432/15) [2017] BVC 28explained and Customs and Excise Commissioners v Midland Bank plc (C-98/98) [2000] ECR I-4177, Abbey National plc v Customs and Excise Commissioners (C-408/98) [2001] ECR 1361 and Kretztechnik AG v Finanzamt Linz (C-465/03) [2005] ECR I-4357followed.
Abbey National plc v Customs and Excise Commissioners (C-408/98) EU:C:2001:110; [2001] ECR I-1361; [2001] 1 WLR 769; [2001] STC 297; [2001] 2 CMLR 28; [2001] All ER (EC) 385; [2001] CEC 80; [2001] BTC 5481; [2001] BVC 581; [2001] STI 244
BLP Group plc v Customs and Excise Commissioners (C-4/94) EU:C:1995:107; [1995] ECR I-983; [1996] 1 WLR 174; [1995] STC 424; [1995] 2 CMLR 750; [1995] All ER (EC) 401; [1995] BVC 159
Church of England Children's Society v Customs and Excise Commissioners [2005] EWHC 1692; [2005] STC 1644; [2005] BTC 5559; [2005] BVC 590; [2005] STI 1340
Customs and Excise Commissioners v Midland Bank plc (C-98/98) EU:C:2000:300; [2000] ECR I-4177; [2000] 1 WLR 2080; [2000] STC 501; [2000] 3 CMLR 301; [2000] All ER (EC) 673; [2000] CEC 441; [2000] BTC 5199; [2000] BVC 229; [2000] STI 852
Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika', Sofia v Iberdrola Inmobiliaria Real Estate Investments (C-132/16) EU:C:2017:683; [2017] BVC 39; [2017] STI 2102
Kretztechnik AG v Finanzamt Linz (C-465/03) EU:C:2005:320; [2005] ECR I-4357; [2005] 1 WLR 3755; [2005] STC 1118; [2005] 2 CMLR 46; [2005] BTC 5823; [2006] BVC 66; [2005] STI 1020
OdvolacíFinančníŘeditelství v Baštová (C-432/15) EU:C:2016:855
OdvolacíFinančníŘeditelství v český Rozhlas (C-11/15) EU:C:2016:470; [2016] BVC 28
Revenue and Customs Commissioners v University of Cambridge [2015] UKUT 305 (TCC); [2015] STC 2353; [2015] BVC 520; [2015] STI 2025
Securenta Gottinger Immobilienanlagen und Vermogensmanagement AG v Finanzamt Gottingen (C-437/06) EU:C:2008:166; [2008] ECR I-1597; [2008] STC 3473; [2010] BVC 766; [2008] STI 939
Skatteverket v AB SKF (C-29/08) EU:C:2009:665; [2009] ECR I-10413; [2010] STC 419; [2011] BVC 359; [2009] STI 2835
Southampton (University of) v Revenue and Customs Commissioners [2006] EWHC 528; [2006] STC 1389; [2006] BTC 5450; [2006] BVC 520; [2006] STI 622
‘Sveda’ UAB v Valstybinė mokesčiuų inspekcija prie Lietuvos Respublikos finansų ministerijos (C-126/14) EU:C:2015:712; [2016] STC 447; [2015] BVC 36
Vehicle Control Services Ltd v Revenue and Customs Commissioners [2016] UKUT 316 (TCC); [2017] STC 11; [2016] BVC 526; [2016] STI 2203
Vereniging Noordelijke Land-en Tuinbouw Organisatie v Staatssecretaris van Financien (C- 515/07) EU:C:2009:88; [2009] ECR I-839; [2009] STC 935; [2009] STI 511
Frank A Smart & Son ltd, a farming company, claimed repayment of VAT it had paid on units of Single Farm Payment Entitlement between 2008 and 2012 from the Commissioners for HM Revenue and Customs. The Commissioners rejected the claim. The company appealed to the First-tier Tribunal (Tax Chamber) against that rejection. The FTT allowed the company's appeal ([2014] UKFTT 1090 (TC)). The Commissioners, thereafter, appealed against that decision to the Upper Tribunal (Tax and Chancery Chamber) The appeal called before the UT judge (Lord Tyre) for a hearing, on 11 February 2016. On 18 March 2016, the UT refused the appeal ([2016] UKUT 121 (TCC)). The Commissioners appealed to the Court of Session against the decision of the UT.
The cause called before an Extra Division, comprising Lord Menzies, Lord Brodie and Lord Drummond Young, for a hearing on the summar roll, on 13 and 14 June 2017.
At advising, on 8 December 2017, the opinion of the Court was delivered by Lord Drummond Young—
[1] Opinion of the Court— The respondent taxpayer is a company that carries on a farming business in Aberdeenshire. The taxpayer has claimed repayment of value added tax amounting to £1,054,852.28 which was paid on its purchase of 34,477 units of Single Farm Payment Entitlement (‘SFPE’). Those units are issued by the Scottish Government in accordance with the EU Single Farm Payment (‘SFP’) scheme, a scheme which makes provision for the payment of agricultural subsidies throughout the European Union. The SFPE units purchased by the taxpayer entitled it, on fulfilling specified conditions, to obtain benefits under the SFP scheme. The units are tradeable. The critical question in the appeal is whether the SFP units were services used or to be used for the purposes of the taxpayer's taxable business supplies, so as to entitle it to repayment of the value added tax charged on them. The taxpayer made a claim to such repayment, but this was refused by HM Revenue and Customs (‘HMRC’). The taxpayer appealed to the First-tier Tribunal, where its claim to repayment was successful ([2014] UKFTT 1090 (TC)). HMRC appealed to the Upper Tribunal, but the...
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