Making hay - has the sun stopped shining?
Those who make hay on a regular basis will know that it can be among the easiest of agricultural crops to grow. It requires relatively little equipment, much of which has changed little over the last 50 years, and it is often an activity which persists long after more intensive cropping has ceased on the farm.
HMRC vs Babylon Farms Ltd
In the cases of HMRC vs Babylon Farms Ltd, the business of haymaking was examined in some detail. The company made hay which it then sold to its co-owner and director, a Mt Mclaughlin. The sales in the period under review were £440, and the hay was made on land belonging to the director and his wife. No invoices were raised, and no payments made until it became clear that these would help the VAT argument. The taxpayer claimed input tax of just under £20,000 on the construction of a barn for the haymaking activities which HMRC disallowed on the basis that Babylon was not carrying on a business.
The taxpayer’s defence ran along two lines. Firstly, it was argued that HMRC could not claim that the company was not carrying on a business whilst the company continued to be VAT registered –the LTT found that this contention was not consistent with the wording of para 13 (2) of Sch 1 VATA : “…where the Commissioners are satisfied that a registered person has ceased to be registrable, they may cancel his registration with effect from the day on which he so ceased” and the appeal on that ground was therefore dismissed.
The second defence was more complex and turned on whether the company was actually carrying on a business at all. The FTT had come to the conclusion that “the Appellant’s activities during the relevant period had been confined to haymaking and the sale of buildings and that these activities had not been conducted on a basis that followed sound and recognised business principles or on a basis that was predominantly concerned with the making of taxable supplies for consideration”. The UTT concluded that whilst the FTT erred in law on some aspects of how this decision was reached, the conclusion was still correct for four reasons:
- The activity was not conducted in a regular manner or on sound principles – it was not even clear whether Babylon even had title to the hay which was sold
- There was no link between the activities and the income. There was only one customer and no evidence that the company made efforts to obtain other customers
- No invoices were ever raised, and payments were only made for the crop when it became relevant to HMRC’s view of the input tax claim
- Babylon did not operate in a general market nor were its sales made on market terms (McLaughlin both set the price of the hay and decided which costs would be borne by the company and which would be paid by the landowner).
Implications from HMRC vs Babylon Farms Ltd
The implications of the case may be slightly wider than one might suppose. According to Agriculture & Rural Business Partner Joe Spencer; “It would appear to confirm HMRC’s right to deregister some small-scale operations which have perhaps shrunk over the years to the point where there is really no commercial operation, but which retain a VAT registration purely to recover input tax. More significantly it is a reminder that where larger operations restructure, perhaps to rewild the estate or move from in hand farming to letting, there is a real danger that where all activities become exempt or outside the scope of VAT, there will be no mechanism for recovering input tax which may arise”.
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