The announcement by the First Tier Tribunal (FTT) earlier this month in favour of the taxpayer in the Colin Newell vs. HMRC case is “a welcome decision” according to Saffery Champness.

Nick Hart, director in the VAT advisory team, Saffery Champness, and a member of the firm’s Landed Estates and Rural Business Group, said:

The positive outcome of this case for the taxpayer will be of particular interest to those businesses and organisations receiving subsidies and grants including those within the farming, not-for-profit and renewable energy sectors.

“The headline being that businesses which only make supplies on which VAT is charged, should not suffer a VAT recovery restriction purely on the basis they receive subsidies and grants even when such income supports an otherwise unprofitable business.”

The case centred around Her Majesty’s Revenue and Customs (HMRC) restricting input VAT recovery on the basis that Newell also received subsidy/grant income, in this instance periodical support payments under the Renewable Heat Incentive (RHI) scheme, which are outside the scope of VAT.

HMRC argued that as Newell’s business was one of undertaking activities to generate heat – the drying and selling of wood chips – this gave rise to his entitlement to RHI payments and, as the VAT on expenditure related to both taxable and ‘outside the scope’ income, this should therefore be apportioned.


Newell successfully argued however that the input VAT should be fully recoverable because receipt of ‘outside the scope’ funds was a subsidy and not an activity.

The Frank Smart Supreme Court case, another VAT case relating to Single Farm Payment Entitlements, was referenced in this latest hearing.

Nick Hart continued:

“The FTT agreed with Newell that there is a direct and immediate link between the VAT incurred and his taxable supplies as the goods and services on which VAT was incurred were used to generate heat, which in turn was used to make taxable supplies.

The FTT concluded that Newell was entitled to recover all of his input VAT.

“Following the Frank Smart case regarding farming subsidies and VAT, this is another welcome decision in the taxpayer’s favour but continues to show HMRC’s reluctance to accept the principal that ‘outside the scope’ income does not always mean that an otherwise fully taxable business should restrict its VAT recovery.”