A POTENTIALLY massive VAT clawback has been avoided in a legal judgment regarding farmscale renewable energy and VAT.

The First-tier Tax Tribunal found in favour of Colin Newell reclaiming VAT on his biomass business operations, subsidised by the Renewable Heat Incentive scheme.

Mr Newell, whose business dries and sells wood chips and other materials, had been up against HMRC, which claimed only a proportion of Mr Newell’s input tax was VAT deductible because a considerable amount of his income came from the RHI and was therefore outside the scope of the VAT system.

Mr Newell lawyers argued that the VAT ought to be fully recoverable because VAT is not supposed to add to the costs of a fully taxable business and because HMRC’s stance would undermine the rationale behind the government’s subsidies for renewable energy. This argument prevailed and the court found no restriction of VAT could be justified where a business only makes taxable supplies, regardless of whether it has been supported by subsidy or even if it would not be viable without government support.

One of those lawyers – Glyn Edwards, VAT Director at MHA MacIntyre Hudson – commented: “Mr Newell’s victory is not only of vital importance for every business drawing funding through the RHI, some of which were already fearing a clawback of VAT, but also for all businesses and charities in receipt of subsidies, such as the Coronavirus Job Retention Scheme. A victory here for HMRC could have meant a sustained attempt to deny VAT recovery to a swathe of business and not-for-profit organisations, especially in the energy, farming and charitable sectors.

“The court’s decision preserves the neutrality of the VAT system. By trying to clawback VAT, HMRC was seeking to undermine the effectiveness of subsidies which the government had specifically designed to promote carbon efficient energy production as it targets net zero emissions by 2050. The RHI is absolutely critical to the renewable energy sector and a VAT clawback would have made the sector much less attractive to investors," said Mr Edwards.

“Had it succeeded, HMRC would likely have extended its logic to agriculture. The sector would have been especially vulnerable because it is currently transitioning to a new post-Brexit system of funding, based on sustainable farming incentives and grants. If depending on these sources of income meant farmers could not recover VAT, farmers would have been in trouble," he said. "Agriculture is also very dependent on the renewables sector, as farmers either operate their own biomass systems or provide fuel for the renewable sector, so being unable to claim back VAT due to dependence on the RHI would have been a big blow.

“It’s even feasible that had the case gone the other way HMRC’s VAT clawback principle could have been applied to commercial operations and non-for-profit bodies that rely on various critical subsidies, including the furlough scheme (Coronavirus Job Retention Scheme)," he added. "Such impacts would clearly have had massive implications for businesses across the UK, so this ruling should be welcomed far and wide.”