On appeal from: [2017] CSIH 77

This appeal considers whether the respondent taxpayer is entitled to deduct the VAT it paid on the acquisitions of single farm payment entitlement (SFPE).

The respondent is a taxpaying company which carried on a farming business in Aberdeenshire. The respondent claimed repayment of VAT paid on its purchase of 34,477 units of single farm payment entitlement (SFPE). The units were issued by the Scottish Government in accordance with the European Union Single Farm Payment (SPF) scheme and were tradeable. The purchase of the units entitled taxpayers to obtain benefits under the scheme on fulfilling specified conditions. The taxpayer’s claim to repayment of VAT was refused by the appellant. The taxpayer appealed to the First-tier Tribunal, who allowed the appeal, holding that the taxpayer’s intention as to the application of payments received on the purchased units, namely to develop its farming business, was critical and the evidence supported the necessary direct and immediate link between inputs and future taxable supplies. The appellant appealed unsuccessfully to the Upper Tribunal and to the Inner House of the Court of Session.

Held: The Supreme Court unanimously dismisses the appeal. 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). 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.

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 fundraising, objectively ascertained, was to fund its economic activity and it later uses the funds raised to develop its business of providing taxable supplies. The same may apply if an analogous transaction involving the sale of shares is classified as an exempt transaction.

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. The existence of a link between the fundraising transaction and the person’s taxable activity is to be assessed in the light of the objective content of the transaction. The ultimate question is whether the taxable person is acting as such for the purposes of an economic activity. This is a question of fact which must 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.

In light of the foregoing, the Court considers that the respondent, when it incurred the costs of the SFPE units, was acting as a taxable person because it was acquiring assets in support of its current and planned economic activities, namely farming and the windfarm. On that basis, the respondent was entitled to an immediate right of deduction of the VAT paid on the purchase of the SFPE units and is entitled to retain that deduction or repayment so long as it uses the SFPs which it received as cost components of its economic activities. Moreover, on the facts founds, the respondent does not carry out and does not propose to carry out downstream non-economic activities or exempt transactions


For judgment, please download: [2019] UKSC 39
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To watch the hearing, please visit: Supreme Court Website: (Morning 6th March 2019)   (Afternoon 6th March 2019)