Was the company making business supplies?

The taxpayer registered for VAT in 2014 and claimed input tax of £19,765 in the three years up to 2017 with no output tax declared in this period. The taxpayer’s only income, apart from an exempt property sale - a capital disposal, was about £440 each year for selling hay to a connected business. Hay sales are zero rated.

HMRC disallowed all input tax on the basis that there was ‘a negligible level of substance to the business activity’ and it was ‘not conducted on sound and recognisable business principles’.

The taxpayer appealed.

The First-tier Tribunal referred to the six business tests established in CCE v Lord Fisher [1981] STC 238. The taxpayer was pursuing hay making ‘seriously and earnestly’ but this was a modest activity carried out on a ‘casual basis’. There was no evidence that the taxpayer could perform this on a commercial basis given that the land belonged to Mr M, the owner of the land. Indeed, Mr M appeared to carry the activity himself without charge. It was only that the taxpayer owned the machinery used in the hay making that led to the conclusion it was involved at all. The tribunal agreed with HMRC that the taxpayer was ‘not predominantly concerned with the making of taxable supplies for consideration’.

The taxpayer’s appeal was dismissed.

Neil Warren, independent VAT consultant, said: ‘The input tax claimed by the company mainly related to the construction of a new barn, supposedly used to store the equipment and machinery used to make the hay. But the reality is that a commercially driven business would not spend £100,000 to earn an annual income of under £500 – it would take 200 years to recover the outlay. It is good that the six business tests in the Lord Fisher case have stood the test of time and are still given a lot of emphasis in this type of case.’

Issue: 4719 / Categories: Tax cases