Does the receipt of a subsidy reduce VAT recovery for agricultural businesses?

22 July 2021

An interesting VAT case which came before the First Tier Tribunal in April has implications rather wider than the fairly narrow circumstances which applied.

The case of Colin Newell-v CIR turned upon the question of whether input tax recovery was available where a substantial part of the business income fell outside the scope of VAT. Mr Newell ran a biomass energy business which used the heat generated by biomass boilers to dry wood chips, animal bedding and grain either as a service to others or for resale. Almost half the income of the business derived from Renewable Heat Initiative (RHI) subsidies, and HMRC argued that his input tax recovery should be restricted proportionately. The Tribunal accepted the taxpayer’s arguments, following a number of other cases including HMRC –v- Frank Smart & Son Ltd, that where a taxpayer is making taxable supplies in the course of a business, the receipt of subsidies does not prejudice full input recovery.

The implications of this for agricultural businesses go beyond the issue of RHI payments. HMRC officers have in the past tried to disallow expenditure linked to, for example, Countryside Stewardship payments. Presumably investigating inspectors have met with some individual successes with this approach, (not least because the amounts can be small, and such compliance inspections are often dealt with directly by unrepresented taxpayers). Had they won this case one could see that HMRC scrutiny might have extended to Feed-in Tariffs or even the new generation of Environmental Land Management Schemes? As the key Basic Payment subsidy is phased out over the next seven years, farmers will be looking at such alternative income streams and it will be vital that the expenditure required to earn such monies under the “public payments for public goods” approach, is not inflated by irrecoverable amounts of VAT.

Commenting on the decision, Agriculture & Rural Business partner, Joe Spencer remarked;

“This really is a victory for common sense. It would be bizarre for someone to be running a business in a way which benefits the environment, and which receives subsidies encouraging him to do so, but then to see part of the benefits clawed back by another government department”.

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