Revenue and Customs v Frank A Smart & Son Ltd (Scotland), [2019] UKSC 39

The taxpayer (“FASL”) purchased entitlements to an EU farm subsidy, the Single Farm Payment (“SFP”). The purchased SFPs 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 current and future business activities, which currently involved only taxable supplies.

Before finding that FASL was entitled to deduct as input tax the VAT which it had incurred on its SFP purchases, Lord Hodge surveyed the ECJ jurisprudence, and stated various propositions, including the following:

ii) There must be a direct and immediate link between the goods and services which the taxable person has acquired (in other words the particular input transaction) and the taxable supplies which that person makes (in other words its particular output transaction or transactions). This link gives rise to the right to deduct. The needed link exists if the acquired goods and services are part of the cost components of that person’s taxable transactions which utilise those goods and services … .

iii) Alternatively, there must be a direct and immediate link between those 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 … .

iv) Where the taxable person acquires professional services for an initial fund-raising transaction which is outside the scope of VAT, that use of the services does not prevent it from deducting the VAT payable on those services as input tax and retaining that deduction if its purpose in fund-raising, objectively ascertained, was to fund its economic activity and it later uses the funds raised to develop its business of providing taxable supplies. …

v) Where the cost of the acquired services, including services relating to fund-raising, are a cost component of downstream activities of the taxable person which are either exempt transactions or transactions outside the scope of VAT, the VAT paid on such services is not deductible as input tax. … Where the taxable person carries on taxable transactions, exempt transactions and transactions outside the scope of VAT, the VAT paid on the services it has acquired has to be apportioned under article 173 of the PVD.

vi) The right to deduct VAT as input tax arises immediately when the deductible tax becomes chargeable … .

vii) The purpose of the taxable person in carrying out the fund-raising is a question of fact which the court determines by having regard to objective evidence.

Lord Hodge then applied these principles, stating (at paras. 66-67):

There was objective evidence that FASL when carrying out its fund-raising activity was carrying out a taxable business and was contemplating using the funds raised on three principal developments - a windfarm, the construction of further farm buildings and the acquisition of neighbouring farmland.

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.

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 (at para. 65) 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 (at para. 67):

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.