Tax Tribunal result in favour of taxpayer 'a welcome decision'

The positive outcome of this case for the taxpayer will be of particular interest to farming businesses
The positive outcome of this case for the taxpayer will be of particular interest to farming businesses

The First Tier Tribunal (FTT) ruling in favour of the taxpayer in the Colin Newell vs HMRC case is 'a welcome decision', accountant Saffery Champness says.

The positive outcome of this case for the taxpayer will be of particular interest to those businesses receiving subsidies and grants, including those within the farming sector.

The case centred around HMRC restricting input VAT recovery on the basis that Mr Newell also received subsidy/grant income.

In this instance, periodical support payments under the Renewable Heat Incentive (RHI) scheme, which are outside the scope of VAT.

Because of this HMRC argued that as Mr Newell’s business was one of undertaking activities to generate heat - the drying and selling of wood chips - this gave rise to his entitlement to RHI payments.

And as the VAT on expenditure related to both taxable and ‘outside the scope’ income, this should therefore be apportioned.

Mr Newell successfully argued however that the input VAT should be fully recoverable because receipt of ‘outside the scope’ funds was a subsidy and not an activity.

Nick Hart, director VAT at Saffery Champness, said: "The FTT agreed with Mr Newell that there is a direct and immediate link between the VAT incurred and his taxable supplies as the goods and services on which VAT was incurred were used to generate heat, which in turn was used to make taxable supplies.

"The FTT concluded that Mr Newell was entitled to recover all of his input VAT.

The Frank Smart Supreme Court case (UKSC 39 2019), another VAT case relating to Single Farm Payment Entitlements, was referenced in this latest hearing.

Mr Hart said: “Following the Frank Smart case regarding farming subsidies and VAT, this is another welcome decision in the taxpayer’s favour.

"But it continues to show HMRC’s reluctance to accept the principal that ‘outside the scope’ income does not always mean that an otherwise fully taxable business should restrict its VAT recovery.”