Revenue and Customs Commissioners v Frank A Smart & Sons Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 March 2016 |
| Neutral Citation | [2016] UKUT 121 (TCC) |
| Date | 18 March 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Lord Tyre
Ross Anderson, Advocate, instructed by the Office of the Advocate General for Scotland, appeared for the Appellants (HMRC)
David Small, Advocate, instructed by Glyn Edwards CTA, Wolters Kluwer, appeared for the Respondent (Frank A Smart & Son Limited)
Value added tax – Input tax – Purchase of Single Farm Payment Entitlement (SFPE) units – Whether used, or to be used, for the purposes of the taxable person's economic activity – Whether direct and immediate link with the taxable person's business – Yes – HMRC's appeal refused – Directive 2006/112 (the Principal VAT Directive), art. 168 – Value Added Tax 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.
The Appellant company ran a farm. Under the Common Agricultural Policy, the Appellant was 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, excluding 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 also entered 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 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 irrecoverable as it did not relate to the making of a taxable supply.
The FTT held that the acquisition of SFPE units was a funding exercise, which related to business overheads.
Neither party argued that there is any material difference between EU and UK law. Primarily, HMRC argued that the SFPE units had been acquired for the purpose of obtaining SFPs, i.e. for the purpose of a non-economic activity outside the scope of VAT. In such circumstances, no right of deduction arose (para. 9 of the decision).
Alternatively, HMRC argued that the FTT had erred in law in holding that there was a direct and immediate link between the cost of acquiring the SFPE units and the company's taxable economic activity, so as to entitle it to reclaim the VAT. There were two ways in which the “direct and immediate link” test could be satisfied:
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1) if there was such a link between the services acquired and a particular output transaction; or
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2) where the services had a direct and immediate link with a clearly defined part of the taxable person's economic activities consisting of the making of taxable supplies, so that the costs formed part of the overheads of that part of the business. In the present case the company claimed to satisfy the test in the second of those ways, but no such link had been established. A causal link between cost incurred on a supply and a taxable person's overall economic activity was insufficient (para. 10 of the decision).
The UT agreed with the FTT, on the basis of its primary findings of fact, that the financing opportunity afforded by purchasing the SFPE units did not form a distinct business activity, but was a “wholly integrated feature of the farming enterprise”, rather than a separate enterprise. There was ample evidence to entitle the FTT to make that finding. The UT rejected HMRC's submission that the FTT had erred in placing weight on evidence of the intention of Mr Smart, as the company's controlling mind. A fundamental feature of the VAT system is that the right to deduct arises immediately on the incurring of the tax, and may be exercised in respect of goods and services intended to be used in connection with taxable transactions (para. 20 of the decision).
The UT considered whether, on the FTT's findings, there was the necessary direct and immediate link between the cost of the SFPE units and the company's taxable business supplies. The input tax was not incurred in connection with a particular output transaction, so the starting point was whether the cost, in respect of which the input tax was charged, was incurred for the purposes of its economic activity in general. If so, it must be considered to be part of the company's overheads. Thus, it is a cost component of the price of the company's products. The necessary direct and immediate link is thereby established. It is unnecessary for the company to prove that the cost in question was built into the price charged for the supply (para. 21 of the decision).
The UT held that, once the cost was found to be for the benefit of the company's taxable activity, as the FTT had found, it must be treated as a cost component of the business's taxable supplies (para. 24 of the decision).
Thus, HMRC's appeal failed.
It might be thought that HMRC's decision to disallow the VAT charged on the SFPEs was due to the Appellant holding so many SFPEs. However, during the hearing, HMRC confirmed that their position was that any purchase of SFPE units, regardless of how closely or otherwise it related to the carrying on of a farming business, fell foul of their primary argument based on use for non-economic activity.
[1] The respondent is a company which carries on a farming business in Aberdeenshire. This appeal is concerned with the company's entitlement to repayment of VAT amounting to £1,054,852.28 which it paid on its purchase of 34,477 units of Single Farm Payment Entitlement (SFPE). These units, which are tradeable, entitled the company, subject to fulfilment of conditions, to benefits under the EU Single Farm Payment (SFP) scheme. The issue arising in the appeal is whether the SFPE units were services used or to be used for the purposes of the company's taxable business supplies, so as to entitle it to repayment of the VAT charged on them. The appellants, HMRC, refused the claim and the company appealed to the First-tier Tribunal (FtT).
[2] At paragraph 38 of its Decision, the FtT set out its findings in fact, which it noted were not generally controversial, as follows:
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a) The appellant company is wholly owned by Frank Smart who is its sole director. He and his wife are the whole partners of “Mr and Mrs Frank Smart, trading as Tolmauds Farm” which owns the farmland there. The farm which extends to about 200 hectares is leased by the appellant company for £30,000 per annum.
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b) The appellant company receives Single Farm Payments (SFPs). These are agricultural subsidies paid by the Scottish Government. At the inception of this scheme in 2005 UK farmers received initial units of entitlement without consideration. These were tradeable and a market in them developed. To claim the SFP in respect of one unit the farmer must have one hectare of eligible land at his disposal on 15 May of the particular year. To satisfy this, the requirements of ensuring plant and animal health and maintaining Good Agricultural and Environmental Condition (GAEC) must be met. This latter condition does not require the claimant personally or anyone else to cultivate the land or stock it with animals.
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c) In addition to leasing Tolmauds Farm the appellant company leased a further 35,150 hectares under seasonal lets. Typically the relative leases were qualified by a post-lease agreement in terms of which the landlord could stock the land or cultivate it himself provided that the ground was kept in GAEC. The rent payable in respect of such seasonal lettings was generally about £1 per acre but could go up to £10 per acre.
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d) At Tolmauds Farm the appellant company produces beef cattle for slaughter and store purposes. It also produces certain crops. It did not cultivate or stock the ground held on seasonal leases. The appellant company ensured that it held more hectares than units to ensure that it received its full entitlements to SFP.
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e) The appellant company paid over a period about £7.7m in respect of traded SFPE units. In addition to its...
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