Scottish farmer Frank Smart has succeeded in his case to reclaim VAT on Single Farm Payment (SFP) entitlements purchases.

Her Majesty’s Revenue and Customs (HMRC) has been appealing to the Court of Session in Scotland, arguing that the VAT incurred on the purchase of SFP entitlements had a direct and immediate link to the subsidies which the taxpayer earned as a result.

The company, Frank Smart & Son, had incurred VAT buying these entitlements.

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As the resulting subsidies are outside the scope of VAT, HMRC believed that VAT on the purchases of SFPs was irrecoverable, as it did not directly relate to any VATable sales activity.

The court rejected those arguments, relying on a line of cases decided by the European Court of Justice.

While all parties agreed that subsidies were outside the scope, the key test was how the income from those subsidies was to be used.

In Frank Smart’s case, the income was invested in his taxable farming activities, including construction of new cattle sheds and wind turbines to generate renewable electricity for the national grid.

Glyn Edwards, MHA MacIntyre Hudson VAT director, said: “The outcome of the case is good news for taxpayers. If HMRC’s argument had succeeded, a large number of farms could have faced assessments from the VAT Office.”