Further commentary on the Frank Smart case
5 Aug 2019
As has been well publicised, Frank Smart & Son Limited has been successful at the Supreme Court in their dispute against HM Revenue & Customs (HMRC). This is an important and welcome decision for those in receipt of farming and other subsidies. However, Sean McGinness, a partner and VAT expert at Saffery Champness, warns that there could be a sting in the tail of the decision.
The taxpayer was successful in arguing that the subsidy received from the Single Farm Payment (SFP) units purchased could be disregarded when considering the VAT recovery position. The purchase of entitlement from another business is subject to VAT and HMRC argued throughout the legal proceedings that the subsidy income had to be taken into account when considering VAT recovery on the units purchased. The subsidy income is outside the scope of VAT and therefore would restrict recovery. It was successfully argued by the taxpayer, notably in four separate hearings from tribunal to the Supreme Court, that the question was the intended “downstream” use of the subsidy and not that the units purchased generated a subsidy in itself that determined the VAT treatment.
Sean McGinness said: “The taxpayer’s representation successfully demonstrated that the intention was to reinvest the subsidy in the farming business. The Supreme Court agreed with this analysis and therefore over £1 million of VAT is due to be refunded. This is good news for the sector where there has been challenges on SFP, their successors and also on the receipt of Renewable Heat Incentive (RHI) payments.
“But, both the Supreme Court, and before it the Inner House of the Court of Session, left some ambiguity in their comments regarding what a business needs to do to demonstrate that the downstream investment will be used for taxable purpose and also that this intention is actually fulfilled. HMRC already has ‘change of intention provisions’ at its disposal and it may seek to utilise these powers, as well as requiring more detail from business at the time of the claim regarding what the business plan is for the subsidies, or other funding received.
“It is important to ensure that taxpayers engage with their advisers when considering funding routes and that a clear business plan and rationale is put in place to demonstrate that the funds received will be invested in the taxable business activity. It remains to be seen what HMRC’s view of this case in conjunction with the University of Cambridge case will be. Having clear evidence of intention and spend of the funds, whilst already important, could become the key to successful VAT recovery on costs associated with subsidies, grants and other fund-raising activities.
“We would expect HMRC to issue a business brief in due course to set out its views.”