Following The Supreme Court’s decision today to rule in favour of Frank Smart & Sons Ltd regarding VAT repayment on the purchase of farm entitlement to CAP subsidy, HMRC will find it more difficult to restrict VAT recovery

Frank Smart & Sons Ltd, a family owned farming company in Aberdeenshire today won its case against HMRC regarding the claim for the repayment of VAT on the purchase of 34,477 units of Single Farm Payment Entitlements.

HMRC refused the claim on the grounds that there was a direct link between the purchase of the entitlements and the receipt of subsidy. As the subsidy was outside the scope of VAT the claim for VAT repayment failed the test that input tax must be linked to a VATable supply.

Frank Smart & Sons Ltd were advised by Glyn Edwards, VAT Director at MHA MacIntyre Hudson who argued that VAT ought to be recoverable because the subsidies were used to develop the farming business i.e. to build cattle sheds, repay a bank loan and to build a wind farm. This argument prevailed, resulting in the unanimous decision of the Supreme Court where the company was represented by leading Scottish Advocate, David Small.

Glyn Edwards commented, “If HMRC had won instead, every business in receipt of subsidy could have been subject to a restricted right of VAT recovery.

“In farming the likely impact would have been that VAT recovery would be restricted, in whole or part, on any costs associated with receipt of subsidy. For example, VAT on farming equipment would be at risk if used to keep land in good agricultural and environmental condition (GAEC), a requirement attached to many subsidies. VAT on professional costs and general overheads would also have been at risk.

“By establishing that subsidy has no role to play in determining VAT recovery, the Supreme Court has asserted an important principle which will protect the true value of subsidy as we move into the post-EU era. In the context of Brexit, the Supreme Court’s decision could be a sign of things to come. The Supreme Court declined to send Frank Smart’s case to the CJEU and were bold in making a decision in his favour.”