Following an unsuccessful appeal by HMRC, farmers should be able to continue to reclaim VAT against purchases of Basic Payment Scheme (BPS) entitlements.
HMRC argued against farmer, Frank Smart, that the VAT incurred on the purchase of his BPS entitlements had a direct and immediate link to the subsidies which the taxpayer earned as a result. However, the Court of Session in Scotland rejected the appeal, relying on a line of cases decided by the European Court of Justice.
While all were in agreement that the subsidies were outside the scope of VAT, the key test was how the income from the subsidies was being used. In this instance, Mr Smart of Frank Smart & Son was investing in his taxable farming activities, which included construction of wind turbines to generate electricity for the National Grid and new cattle sheds. If the subsidies are invested in ongoing taxable activities, then no input tax restrictions should apply.
If HMRC’s argument had succeeded, a large number of farms could have faced assessments as a result.
If you think this may affect you, please contact our VAT specialists who’ll be able to help.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.