Class 1A NIC reports, CIS gross payment status, When can VAT be reclaimed?

Much of tax compliance is about detail - sending the correct information to HMRC at the right time in the specified form. Last week we had some tips on how to comply with the requirements for class 1A NIC, and the new compliance test for CIS gross payment status. We also reported a VAT case which may have wider implications for businesses which are trying to raise funding from a variety of sources. 

This is an extract from our topical tax tips newsletter dated 21 April 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>> 

When can VAT be reclaimed? 
A VAT registered trader can reclaim VAT he incurs on goods and services to be used for the purpose of making taxable business supplies. Goods or services which are used for non-business activities, or for generating VAT-exempt sales, can't be included in a VAT claim, unless the partial exemption rules apply. 
  
This is the foundation of the VAT system, and clients need to be reminded of this occasionally. HMRC are increasing questioning whether costly purchases are used for a purpose that generates VATable sales, and thus whether the VAT can be reclaimed. In a recent case HMRC attempted to block the repayment of VAT paid on the purchase on single farm payment entitlements (SFPE). 
  
SFPE units gave the farmer entitlement to receive certain EU farming support payments. The SFPE units could be traded, and gains made on their sale qualified for business asset roll-over relief for CGT. The SFPE scheme was replaced by the Basic Payment scheme which came into effect from December 2013, but the principles are the same. 
  
Frank Smart & Sons Ltd was building up its beef cattle farming business. The company acquired 34,777 units of SFPE and paid VAT on that purchase of £1.054m. Those units generated between £1.7m to £2.4m per year of single farm payments for the farm, which used that money to pay down its overdraft, build additional farm buildings and acquire surrounding farm land. 
  
HMRC argued that the SFPE units were acquired for the purpose of generating income which was a non-economic activity outside the scope of VAT, so the VAT paid on the purchase of the units could not be reclaimed. HMRC chose to ignore the fact that the single farm payments were used to build assets for the business. The First-tier and the Upper-tier Tribunals both agreed that the purchase of the SFPE were an integrated feature of the farming enterprise. Also the costs of acquiring the SFPE units were part of the business overheads, which formed a component of the price of the farm's products - in this case beef cattle. 
  
This case could have wider implications for businesses who incur costs to generate sources of finance such as grants or crowd funding. Our VAT experts can advise on any unusual VAT-reclaim situations which your clients may experience.

This is an extract from our topical tax tips newsletter dated 21 April 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 
The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week. You can obtain future issues by registering here>>>