The taxpayer company carried on a farming business in Scotland producing beef cattle and crops, the whole output of which was taxable under the VAT regime. Single farm payments (“SFPs”) were agricultural subsidies which between 2005 and 2014 were paid to farmers with eligible land at their disposal and who met the requirements of ensuring plant and animal health and maintaining the land in good agricultural and environmental condition, which did not require the farmer to cultivate or stock the land. The receipt of SFPs was outwith the scope of VAT. The taxpayer received from the Scottish Government an initial allocation of 194.98 units of entitlement to single farm payments (“SFPEs”) for its farm of some 200 hectares. Taking advantage of the market in SFPEs to accumulate a fund for the development of its business, the taxpayer, with bank funding, spent about £7.7m on purchasing 34,477 units on which it paid VAT. In order to receive the SFPs to which the purchased SFPEs entitled it, the taxpayer leased 35,150 hectares of land under seasonal lets, which it did not cultivate or stock and which were typically subject to agreements providing that the landlord could stock or cultivate the land himself so long as the ground was kept in good agricultural and environmental condition. The taxpayer’s claim in its VAT returns to deduct as input tax the VAT it paid on the purchased SFPE units was refused by the revenue. The First-tier Tribunal, sitting in Edinburgh, allowed the taxpayer’s appeal, finding that, when the taxpayer bought the SFPE units, it had intended to apply the income it received from the SFPs to pay off its overdraft and to develop its business operations, including its future plans to establish a wind farm, construct further farm buildings and purchase neighbouring farms, that the SFPs had been accumulated in its bank account and had been used to pay off its overdraft; that, therefore, the acquisition of the SFPE units was a funding exercise which related to the taxpayer’s business overheads in its farming enterprise, there was a direct and immediate link between the expenditure and the taxpayer’s future taxable supplies and the funding opportunity afforded by the purchase of SFPE units was a wholly integrated feature of the farming enterprise, and that, accordingly, the VAT paid on the SFPE units was deductible as input tax. The Upper Tribunal and an Extra Division of the Inner House of the Court of Session dismissed the revenue’s appeals.
On the revenue’s further appeal—
Held, (1) in relation to Council Directive (EC) 2006/112/EC and the Value Added Tax Act 1994 the following propositions were to be derived from the case law of the Court of Justice of the European Union. (i) Because VAT was a tax on the value added by the taxable person, the VAT system relieved the taxable person of the burden of VAT payable or paid in the course of that person’s economic activity and thus avoided double taxation. (ii) In order for the right to deduct to arise there should be a direct and immediate link between the goods and services which the taxable person had acquired and the taxable supplies which that person made. The necessary link existed if the acquired goods and services were part of the costs components of that person’s taxable transactions which utilised those goods and services. (iii) Alternatively, there should be a direct and immediate link between those acquired goods and services and the whole of the taxable person’s economic activity because their costs formed part of that business’s overheads and thus a component part of the price of its products. (iv) Where the taxable person acquired professional services for an initial fund-raising transaction which was outside the scope of VAT, that use of the services did 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 used the funds raised to develop its business of providing taxable supplies; the same might apply if an analogous transaction involving the sale of shares were classified as an exempt transaction. (v) Where the cost of the acquired services, including services relating to fund-raising, were a cost component of downstream activities of the taxable person which were either exempt transactions or transactions outside the scope of VAT, the VAT paid on such services was not deductible as input tax. Where the taxable person carried on taxable transactions, exempt transactions and transactions outside the scope of VAT, the VAT paid on the services it had acquired had to be apportioned under article 173 of Council Directive (EC) 2006/112/EC. (vi) Under article 167 of Council Directive (EC) 2006/112/EC, the right to deduct VAT as input tax arose immediately when the deductible tax became chargeable and as a result there might be a time lapse between the deduction of the input tax and the use of the acquired goods or services in an output transaction. Further, where the taxable person acquired the goods and services for its economic activity but, as a result of circumstances beyond its control, it was unable to use them in the context of taxable transactions, the taxable person retained its entitlement to deduct. (vii) The purpose of the taxable person in carrying out the fund-raising activity was a question of fact which the court determined by having regard to objective evidence. The existence of a link between the fund-raising transaction and the person’s taxable activity was to be assessed in the light of the objective content of the transaction, the ultimate question being whether the taxable person was acting as such for the purposes of an economic activity, which was a question of fact to be assessed in the light of all the circumstances of the case, including the nature of the asset concerned and the period between its acquisition and its use for the purposes of the taxable person’s economic activity (para 60).
(2) Appeal dismissed. In the present case, the taxpayer had been acting as a taxable person when it had incurred the costs of the purchase of the SFPE units because it had been acquiring assets in support of its current and planned economic activities. Therefore, the taxpayer was entitled to an immediate right of deduction of the VAT it had paid on the purchase of the SFPE units and was entitled to retain that deduction or repayment so long as it used the SFPs which it received as cost components of its economic activities. Further, since on the facts found by the First-tier Tribunal the taxpayer did not carry out and did not propose to carry out downstream non-economic activities or exempt transactions, there was no question of apportionment under article 173 of Council Directive (EC) 2006/112/EC. Accordingly, the taxpayer was entitled to deduct input VAT incurred on its acquisition of SFPE units and the tribunals and Inner House had been right so to conclude (post, paras 24, 59, 68, 71).
Per curiam (i) While a claim for deduction which depends on the future behaviour of the taxable person may create practical difficulties for the revenue in administering the VAT system fairly and, in particular, in avoiding unwarranted repayments of VAT, it is an established part of the VAT system that a taxable person is entitled to an immediate deduction of the VAT which it has paid. It is also well-established that a taxable person can claim to deduct as input tax VAT which it has paid on the acquisition of goods or services although it will not use those goods or services as components of taxable transactions immediately (para 69).
(ii) The recognition that fund-raising costs may, where the evidence permits, be treated as general overheads of a taxable person’s business means that the taxable person must be able to provide objective evidence to support the connection between the fund-raising transaction and its proposed economic activities. The taxpayer also needs to maintain adequate banking arrangements and records to vouch the later use of funds so raised to demonstrate its entitlement to deduct and to retain the deduction, if investigated. The taxpayer will have to repay input VAT if it does not use the input goods or services for the purposes of its economic activity. Under regulation 3 of the Value Added Tax (Supply of Services) Order 1993 the revenue has power to charge VAT where a taxable person uses services supplied to it for its business for a purpose other than a business use, by treating that use as a supply of services in the course of its business. This may involve the revenue in more investigations than the Court of Justice of the European Union envisaged but such supervision of the subsequent use of the raised funds with which the services were associated is an inevitable consequence of the Court of Justice’s interpretation of Council Directive (EC) 2006/112/EC (para 70).
Kieron Beal QC and Ross Anderson (instructed by Office of the Advocate General for Scotland, Edinburgh) for the revenue.
David Small (instructed by Addleshaw Goddard llp, Edinburgh) for the taxpayer.