-
Articles
-
Farming Articles
The reality of farming in 2016 is that the farm subsidy now known as the Basic Payment Scheme (BPS), previously known as the Single Payment Scheme (SPS), supports the farming industry to a point that, at a general level, it makes up the net profit in farming.
Often in recent years it has made up more than the net profit received from the trade of farming.
The BPS is an annual income stream and the entitlements, formerly Single Farm Payment Entitlements (SFPE), are the registered right to receive this income. Where there are “naked acres”, which is any eligible land without entitlements, farmers will need to purchase entitlements on the open market to enable them to claim any BPS on the land (see below). At the First-tier Tribunal (FTT) in the case of Frank A Smart Ltd v HMRC it was argued that the input VAT could not be claimed against the purchase of the SFPE. The FTT’s find was that the SFPE’s had a link with the farming business and was of the nature of an overhead. The case won at the FTT but HMRC took the case to the Upper Tribunal (UT) who agreed with the FTT (Frank A Smart Ltd UKUT0121).
Proving sufficient links to farming
The UT considered that the SFPE were of significant value compared to the needs of the farms. The UT agreed that the cost of the SFPE had sufficient link with the farming business to be an overhead and input VAT could therefore be reclaimed. This went against HMRC’s views, that the purchase of the entitlements was the entitlement to a stream of income, as it lacked sufficient direct and immediate links with the trade of farming. That view is ironic in the fact that the farming industry’s dependency on the income stream is one of survival.
As the UT decision goes against the HMRC manual there could be many input VAT claims to be made by those who have purchased entitlements and not claimed the input VAT.
The Chairman of the UT stated that “it is unnecessary for the company to prove that the cost in question was actually built into the price charge for the supply”. This goes against the so-called “cost component” approach by HMRC where they reject claims for input VAT where the costs are not reflected in the prices of supplies made by the claimant. It was considered that the purchase of SFPE units was not a separate business and the cost was a business expense and therefore the claim for input VAT was allowable.
Julie Butler FCA, Butler & Co
Farming and Rural Business Group, October 2016
Julie Butler FCA is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning, and Stanley: Taxation of Farmers and Landowners (LexisNexis).