In Colin Newell v HMRC [2021] TC08149, the First Tier Tribunal (FTT) found that the receipt of subsidy income by a biomass business did not restrict input VAT recovery.

  • Mr Newell operated a business generating hot air from burning wood chips.
    • This hot air was used to dry other wood chips for use as animal bedding or solid fuel for biomass boilers. Other materials were dried for animal bedding and feed.
    • Dried materials owned by Mr Newell were either retained for future burning or sold.
    • Mr Newell charged for a drying service where the items dried were owned by other people.
  • All sales made by the business were taxable supplies for VAT purposes. No exempt supplies were made.
  • Mr Newell also received ‘Periodic Support Payments’ (PSPs) under the Renewable Heat Incentive Scheme (the scheme) for Northern Ireland, designed to ‘facilitate and encourage the renewable generation of heat’.
    • PSP receipts represented 47.37% of total income between 1 November 2014 and 31 January 2017, and 28.96% of total income between 1 February 2017 and 30 April 2018.
  • It was agreed that the PSPs were:
    • Not subsidies directly linked to the price of the supply, nor were they consideration received from a third party for supplies made to customers.
    • Outside the scope of VAT.
  • Mr Newell’s VAT returns had been prepared on the basis that all input VAT was fully recoverable.
  • HMRC sought to disallow a proportion of Mr Newell's input VAT deduction owing to the outside the scope of VAT PSPs.
  • Mr Newell Appealed to the FTT.

HMRC's view was that Mr Newell was carrying on an activity that gave rise to income: some of which was taxable and some outside the scope of VAT. Accordingly, input VAT recovery should be restricted to the extent that the VAT incurred was attributable to the taxable supplies.

Mr Newell argued that the PSPs were received without having conducted any activities outside the scope of VAT. All of his activities were taxable and so there should be no restriction to input VAT recovery. 

The FTT allowed Mr Newell’s appeal:

  • PSPs were received for generating heat. Mr Newell had registered under the scheme, accredited his boilers and made the necessary submissions. He had not burnt wood chips and generated heat purely to qualify for PSPs.
  • There was a direct and immediate link between Mr Newell’s purchases and his taxable supplies. This formed the basis of entitlement to recover input VAT.
  • There was not a direct and immediate link between the purchases on which input VAT was paid and the receipt of the outside the scope PSP income.
  • Whether the business was viable in the absence of PSPs was irrelevant. 

Useful guides on this topic

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When can a business voluntarily register for VAT? When would it be beneficial to voluntarily register?

Partial exemption & input VAT
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules? 

Registering for VAT
When should a business register for and charge VAT? What are the VAT registration limits and VAT rules after Brexit? What penalties might HMRC issue for late notification of registration?

Starting in business: VAT
One of the first decisions to make when starting in business is whether or not you should register for VAT. 

External link

Colin Newell v HMRC [2021] TC08149


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