Farmers may be able to reclaim VAT on Single Farm Payment Entitlements (SFPEs) if the income from subsidies was to be invested into taxable farming activities.
HMRC has lost an appeal at the Court of Session, Scotland, after arguing VAT incurred on the purchase of SFPEs was irrecoverable as subsidies were outside the scope of VAT and did not directly relate to taxable activity.
The company involved, Frank Smart and Son, had incurred VAT buying entitlements, with the income to be invested in the construction of new cattle sheds and wind turbines.
Glyn Edwards, VAT director at MHA MacIntyre Hudson, said: “The outcome of the case is good news for taxpayers. If HMRC’s argument had succeeded, a very large number of farms could have faced assessments from the VAT office.”
He added the case also undermined HRMC’s ‘current attack’ on businesses profiting from the Renewable Heat Incentive, in which HMRC has argued capital expenditure on the energy equipment has a direct and immediate link to the receipt of subsidy.
“If the subsidies are invested in ongoing taxable activities, no input tax restriction should apply,” he added.
He highlighted there could also be benefits for the not-for-profit sector as the traditional view of VAT not being able to be claimed on costs generating non-business income could be ‘over-restrictive’.