Recovery of input tax incurred on the purchase of Single Farm Payment Entitlement (SFPE) units.

HMRC often reject claims for input tax as they consider that they relate to non-business activities, or more nebulously the costs are not reflected in the prices of supplies made by the claimant (the so called “cost component” approach).  This very helpful Upper Tribunal (UT) case provides insight into the logic applied by HMRC in reaching a decision to disallow a claim for VAT incurred.

This was a company which farmed land and also paid VAT on the purchase of SFPE units.  These units entitled the company to receive benefits via the EC Single Farm Payment Scheme.  HMRC contended that the receipt of the SFPE payments was non-business, or in the alternative, they were not a cost component of any taxable supply made by the farming company.

The UT refused HMRC’s appeal against the initial FT-T decision in favour of the appellant.  It found that there was sufficient evidence that the purchase of the SFPE units (and the income which resulted in the acquisition of them) was not a separate activity to the farming supplies so the non-business argument did not apply.  Further, the Chairman stated that “…it is unnecessary for the company to prove that the cost in question was actually built into the price charged for the supply”. Therefore the cost component contention put forward by HMRC also failed.

The Chairman’s comments appear to go against HMRC’s published guidance on “direct and immediate link with the taxable person’s business”, particularly in respect of holding companies.

If you are aware of any situation where HMRC have disallowed claims for input tax for either non-business or non-cost component reasons please contact us as this case may be of benefit.

Full decision here