Frank A Smart & Son Ltd – UK Supreme Court indicates that input credits were available for fund raising costs of a taxable business

CRA may take the view that GST/HST costs incurred in raising funds, e.g., through issuing shares or debt, will not give rise to input tax credits in the absence of relief under ETA s. 185(1), because the first order supply being made is an exempt financial service. The European VAT jurisprudence initially took a similar approach, but that jurisprudence has evolved.

The taxpayer (“FASL”) purchased entitlements to an EU farm subsidy, which generated annual subsidies over several years (which initially exceeded 30 times its cattle sales revenues from its farming operation) and intended to use the money so generated to fund its future current and future business activities, which currently involved only taxable supplies.

In finding that FASL was entitled to deduct input credits for the VAT on its taxable purchases of the subsidy rights, Lord Hodge referenced the principle that such credits were available where there is “a direct and immediate link between th[e] acquired goods and services and the whole of the taxable person’s economic activity because their cost forms part of that business’s overheads and thus a component part of the price of its products” and noted that under the VAT jurisprudence, this test could be satisfied, for example, respecting costs incurred in a fund-raising activity, such as a sale of shares, that had such a link to prospective taxable activities of the fund raiser’s business. He then stated:

I do not detect in the jurisprudence of the CJEU any basis for distinguishing expenditure incurred in a fund-raising exercise which takes the form of a sale of shares from a fund-raising exercise that involves the receipt of a subsidy over several years.

Neal Armstrong. Summary of Revenue and Customs v Frank A Smart & Son Ltd (Scotland) [2019] UKSC 39 under ETA s. 141.01(2).