For VAT purposes the sale of basic payment scheme entitlements (BPSEs) is treated as a supply of services. As such, where they are sold by a VAT registered business, the purchase price is subject to VAT at the standard rate of 20%. Like any other business outlays, it is important that farmers can recover this VAT as input tax - otherwise it represents an additional, sticking cost of doing business.

Thankfully, the Upper Tier Tribunal in HMRC v Frank A Smart & Sons ('Smart') has reaffirmed an earlier decision on just this point, which is good news for farmers and landowners looking to recover VAT on the purchase of BPSEs.


The facts in Smart are straightforward. Frank A Smart & Sons (the Company), operated a farming business on 200 acres of let farmland. Between 2008 and 2012, the Company purchased 34,477 units of entitlement under the old single farm payment scheme (SFPEs) for around £7.7 million, incurring VAT of a little over a million pounds. In order to benefit from the entitlements, the Company also took seasonal lets over some 35,000 hectares of land. It did not cultivate crops on livestock on the additional land, but it was sufficient for the Company to qualify for payments under the single farm payment scheme.

The purpose of purchasing the entitlements was to fund the repayment of company overdrafts as well as developing its business (potentially via further agricultural buildings and the establishment of a windfarm).

Tribunal Hearing

When the Company sought to recover the VAT incurred on the SFPEs, HMRC refused its application on the grounds that the purchase of the SPFEs was not attributable to any supplies made by the farming business. Rather, HMRC argued, the purpose of the SPFE purchase was simply to obtain payments under the scheme. This was done for its own sake and not for the purposes of the farming business per se. As such there could be no entitlement to VAT recovery.

These arguments have now been rejected at both levels of the UK tribunal system.

The tribunals held that the SFPEs, while not attributable to any particular supplies made by the company, were purchased as part of the farming business as a whole. There was a clear intention for the funds generated to be used for the business. Importantly, while the purchase of the SFPEs could not be directly linked to any particular supplies made in the farming business, neither could they be linked to any non-business activities. This is in clear contrast to the decision in the University of Southampton case in which some costs were clearly linked to non-business research projects. Accordingly the company was entitled to VAT recovery on the purchase of the SFPE units.

Why it is helpful

The latest decision in Smart is useful for two reasons. Firstly, it affirms the entitlement to recover VAT incurred on the purchase of SFPE units and consequently BPSE units under the new scheme which are intended to be used in the course of a farming business. Secondly, it sets out that (as was the case here), where a cost forms part of the overall business, there is no need to prove a direct link between the cost and any supplies of that business for VAT recovery to be allowed. As such, where a farming business is involved in making solely taxable supplies (usually zero rated), VAT incurred when buying BPSE units should be recoverable in full if the relevant intention can be shown.


Alan Barr