Frank A Smart & Son Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 December 2014 |
| Neutral Citation | [2014] UKFTT 1090 (TC) |
| Date | 08 December 2014 |
| Court | First-tier Tribunal (Tax Chamber) |
[2014] UKFTT 1090 (TC)
Judge Kenneth Mure QC, Mrs Eileen A Sumpter, WS
David Small, Advocate, with Glyn Edwards, CTA appeared for the Appellant company
Mrs E McIntyre, Officer of HMRC appeared for the Respondents
Value added tax - Purchase of Single Farm Payment Entitlements (SFPEs) - Whether referable to farm business - Yes - Appeal allowed.
The First-tier Tribunal (FTT) allowed the appeal against HMRC's decision that the purchase of the SFPEs represented an investment, i.e. a non-business activity.
The Appellant company runs a farm. Under the Common Agricultural Policy, the Appellant is entitled to benefits under the Single Farm Payment (SFP) Scheme. Initially, it received 194.98 units of Single Farm Payment Entitlements (SFPEs). Units of SFPEs may be traded. In addition to its initial allocation, the Appellant purchased units at a cost in excess of £7m, exclusive of VAT of £1,054,852. To secure payment of the SFPEs, the Appellant must have "at its disposal" on 15 May of the relevant year one hectare of agricultural land. For each unit and for this purpose, it entered into seasonal grazing leases. In conjunction with each lease, it entered also into a post-lease agreement with the landlord, which enabled the latter to continue farming the land. Provided that the land was maintained in Good Agricultural and Environmental Condition (GAEC), which the post-lease agreement stipulated, the Appellant was considered to hold the land "at its disposal" for purposes of payment of the SFPEs.
The Appellant company purchased the units in order to use the income arising in settling its overdraft and both developing and diversifying its farming business.
HMRC refused credit for the £1,054,852 on the basis that the purchases of SFPEs represented an investment, i.e. a non-business activity. VAT on the purchase of the entitlements was allegedly not recoverable as it did not relate to the making of a taxable supply (para. 21 and 32 of the decision).
The FTT held that the acquisition of SFPE units was a funding exercise and related to business overheads (para. 39 of the decision).
The FTT held, in favour of the Appellant, that the financing opportunity afforded by purchasing the SFPE units did not form a distinct business activity. Given the intended and actual application of the profits, it was an integrated feature of the farming enterprise. It was not a separate enterprise. None of the receipts was abstracted for any unrelated or personal purpose (para. 42 of the decision).
HMRC's decision to disallow the VAT charged on the SFPEs was probably due to the Appellant holding so many SFPEs. Generally, VAT can be reclaimed on purchases of SFPEs by farmers.
[1]The Appellant company runs a farming business, rearing cattle and producing some crops. It occupies principally Tolmauds Farm, Aberdeenshire, which extends to about 200 hectares, and which it leases from a family partnership. Under the Common Agricultural Policy of the EU the Appellant is entitled to benefits under the Single Farm Payment ("SFP") Scheme. It received initially 194.98 units of Single Farm Payment Entitlements ("SFPEs"). Units in terms of the Scheme may be traded and in addition to its initial allocation the Appellant company purchased further units at a cost in excess of £7M exclusive of VAT of £1,054,852.28. To secure payment of the SFPEs the Appellant company required to have "at its disposal" on 15 May of the relevant year one hectare of agricultural land for each unit, and for this purpose it entered various seasonal grazing leases. In conjunction with each lease it entered also a post-lease agreement with the landlord which enabled the latter to continue farming the land by stock or cultivation. Provided that the land was maintained in Good Agricultural and Environmental Condition ("GAEC"), which the post-lease agreement stipulated, the Appellant company was considered to hold the land "at its disposal" for purposes of payment of the SFPEs. Repayment of the VAT has been refused by the Respondents, and that is the subject of this Appeal. The amounts in dispute for the various tax periods which extend from that ending in December 2008 to that ending in June 2012 are set out in paras 3 and 4 of the Joint Minute of Agreement lodged for purposes of the Appeal.
[2]We were referred to the provisions of the Value Added Tax Act 1994 ("VATA") and the relative VAT Regulations (SI 1995/2518). In addition extensive reference was made to the relevant case-law which is listed in the Appendices hereto.
[3]The Appellant led three witnesses, its sole director and shareholder, Frank Alexander Smart, its accountant Graham Thomson CA, and one of Mr Smart's sons, Stuart Smart, who is involved to a limited extent in the management of the farming business. The Respondents led one witness, Miss Sheila Rennie, its investigating officer, who having sought guidance from senior colleagues determined that the repayment of VAT should be refused.
[4]Mr Frank Smart adopted the terms of his Witness Statement. He explained that after attending agricultural college he joined his parents' farming business. He established the Appellant company which now leases Easter Tolmauds Farm from a partnership of himself and his wife. He had been tenant of the farm but had acquired the landlord's interest in about 1997. The company bought SFPE's to obtain the annual payments with a view to funding the expansion of the business. Mr Smart is the sole director and shareholder of the company and works on the farm full-time. The only other full-time employee is his son, Roderick. His son, Stuart, was company secretary but has now only a limited involvement in management and administration. Mr Smart himself has not taken any director's salary or bonus but receives dividends at a relatively modest level as a tax efficient form of income. The business rears beef cattle and grows to an extent crops. Plans to diversify into production of electricity by wind turbines is contemplated.
[5]Next, Mr Smart explained that SFPE units became tradeable. He retained his own allocation. For a claim one hectare of eligible land had to be at the farmer's "disposal" as at 15 May of the particular year. Different units are entitled to different amounts of SFP, which is reflected in the unit price. The company ensures that it has at least sufficient hectares to fulfil its claim. The company tended to hold more hectares than units to allow for a margin of error. The main practical requirement on the claimant was to ensure that the land was kept in GAEC. It entered leasing arrangements to hold sufficient eligible land, but it did not have to farm it actively itself by means of post-lease agreements. These essentially enabled the landlord to continue to farm the land leased. Mr Smart explained that the claim for SFPEs must be in Euros, but this can be converted into sterling. After payment in Euros, the conversion into Sterling can be made at any later date which may give a currency exchange advantage. The Appellant company's claims for SFP have not been the subject of any serious scrutiny. This Scheme, Mr Smart noted, is to be revised in 2015.
[6]Next, Mr Smart explained the need for farming subsidies. Production costs tended to outweigh sale prices. He was anxious to expand the company's business and saw purchasing SFPE's as a means of financing this. He acknowledged that such ploys had been the subject of public criticism. However, there was an established market in trading in SFPEs.
[7]The company had retained the original SFPE units allocated to it. From February 2007 to March 2012 it had invested about £7.7M plus VAT in acquiring additional SFPEs. Its bankers, the Clydesdale Bank, had been helpful in financing this. Latterly SFPEs had been bought where the seller was not charging VAT. The object was to generate cash to finance business expansion. The price of the units depended on the return and the terminal date of the Scheme, which in fact had been extended. The return varied on the individual unit. Initially expansion could not be contemplated because the acquisition cost had to be met before a gain resulted. The seasonal lets had not been used for conventional farming. This would have required an up-front investment in stock. Mr Smart considered the preferable course was to subsidise farming on the existing ground, and to invest in the improvement of farm buildings, and diversification into wind energy.
[8]Mr Smart referred to the terms of one of the SFPE claims. He noted that the total of the units of entitlement was marginally less than the number of hectares at the company's "disposal". This avoided any marginal problems of eligibility. He emphasised too that the requirement of having land at its "disposal" did not require the company to actively farm the land itself. The SFP system required the ground to be maintained in good agricultural condition. Via the leases and post-lease agreements the cross compliance obligations should ensure this. The initial leases were of land in a relatively close proximity to Easter Tolmauds. That reflected the original intention of the company to stock the land itself. Later it rented land further afield as it concerned itself only with the maintenance of its agricultural condition.
[9]Mr Smart acknowledged that there had been two sales of SFPEs in 2008 and 2009. These had been at a favourable price and the proceeds were used to purchase smaller value entitlements at a lower cost and, also, to reduce the level of bank borrowings. The Clydesdale Bank had been prepared to fund these purchases by way of normal overdraft facilities. The Bank considered that it had sufficient security over the company's assets. The company maintained a Euro account with the Bank which enabled advantage to be taken when the Pound Sterling/Euro exchange rate was favourable. Only...
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Revenue and Customs Commissioners v Frank A Smart & Sons Ltd
...Act 1994 (“VATA 1994”), s. 24. The Upper Tribunal (UT) dismissed HMRC's appeal against the decision of the First-tier Tribunal (FTT) ([2014] TC 04179) that the purchase of the SFPE units did not represent an investment, i.e. there was a business activity so certain input tax was recoverable......