Hay sales were not economic activity for VAT

In Babylon Farm Limited v HMRC [2021] UKUT 0224, the Upper Tribunal (UT) found that the First Tier Tribunal (FTT) had erred in law but had been correct to find the appellant's hay supplies did not constitute an economic activity for VAT purposes.

• The company sold hay to its director, Mr McLaughlin, who also owned the land from where the hay was produced.
• Mr McLaughlin set the price of the hay and decided which costs were borne by the company.
• With annual sales of £440, the company claimed input VAT of £19,760 predominantly relating to the building of a new barn.
• The FTT upheld HMRC's decision to deny the claim for input VAT. It also held that in order to claim that the company was not carrying on a business for VAT purposes, the company did not first need to Deregister for VAT.
• Babylon Farm appealed to the UT on the grounds that:
  • HMRC could not deny input VAT claims on the basis of not carrying on a business without first deregistering the company.
  • On whether there was a business for VAT purposes, the FTT had failed to consider the European Principle VAT Directive (PVD) or the correct approach as set out in Wakefield College v HMRC [2018] EWCA Civ 952 (Wakefield).

On the first point of appeal, the appellant argued that a person is a taxable person and so entitled to claim input VAT so long as that person is Registered for VAT, according to VATA 1994. The legislation requires HMRC, at para 13 (2) Sch 1 VATA 1994, to deregister anyone who ceases to be registrable.

• The UT found that the legislation permitted cancellation through the use of the word 'may' but did not require it.
• The reclaiming of input VAT is not automatic if made by a taxable person. It requires the carrying on of a business. The PVD expresses the same principle but by reference to economic activity.
• This ground for appeal was dismissed.

The UT considered the second ground for appeal and found that by not considering the PVD and not applying the process as set out in the leading case, Wakefield, the FTT had erred in law. The UT remade the decision and found:

• Court of Justice of the European Union (CJEU) case law sets out a two-stage test. Firstly, did the company make a supply of goods or services for consideration? The UT accepted it did and HMRC agreed.
• Secondly, is there a 'direct link'  between the supply and the payment received?
  • The haymaking was a continuous activity.
  • It was not undertaken on a commercial basis, there were no staff or costs other than the equipment used.
  • Mr Mclaughlin was the only customer and his control over the terms of the transaction meant there was a lack of symmetry between the costs and the income as required by the CJEU.
  • A lack of VAT invoices, insurance or other customers indicated the absence of a business with the purpose of obtaining income.
• There was no economic activity and the second ground of appeal was also dismissed.

Useful guides on this topic

Haymaking for own livery not a business for VAT   
In Babylon Farm Ltd v HMRC [2019] TC7356  a company that produced hay and maintained outbuildings on its owners' land was not found to be running a business for VAT and a £19k input VAT claim was disallowed.

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

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?

Deregistration
When do I have to deregister for VAT?  When can I voluntarily deregister?  What penalties might HMRC issue if I am late notifying them of mandatory deregistration?

External links:

Babylon Farm Limited v HMRC [2021] UKUT 0224