Effect of subsidy payments on input tax

The taxpayer traded as a hot air generating business and received periodic support payments under the renewable heat incentive scheme. These payments were outside the scope of VAT and that issue was not in dispute. However HMRC decided that because the receipts were a significant part of the taxpayer’s business and he would not be profitable without them his input tax should be reduced. It said input tax could only be claimed based on the formula:

Taxable sales divided by taxable plus outside the scope sales equals the percentage of input tax to claim on expenses.

The department raised an assessment disallowing 47% input tax for the period November 2014 to January 2017 and 29% for the period from February 2017 to April 2018.

The taxpayer appealed. He said there was no need to restrict his input tax because he had no exempt supplies only taxable...