The hanging haystacks of Babylon: is this a business for VAT purposes?

October 23, 2019

Simon Levine

Babylon Farm Limited (“Babylon”) submitted an appeal against HMRC’s decision to disallow VAT recovery. HMRC found that Babylon, which produced hay and maintained outbuildings on its owners’ land, was not running a business for VAT.

The onus of proof in the appeal was on Babylon to convince the First-tier Tribunal (“FTT”) that it should be entitled to credit for the VAT it had incurred. It was incumbent upon Babylon to demonstrate that it was engaged in an economic activity and operating a business during the relevant period.

The FTT concluded that HMRC had been correct to disallow VAT recovery as Babylon had not conducted its business on sound and recognised business principles that were predominantly concerned with the making of ‘VATable’ supplies for consideration.

The appeal was dismissed.

The facts

Babylon had a history of farming activity since 1989 and had provided various services to other businesses owned by Mr McLaughlin (“ML”). In the period between May 2014 and May 2017, Babylon had been involved in launching two new business services and it provided accommodation and business services to those businesses. In addition, in the same period, Babylon was looking to sell certain farm buildings which it owned.

It is understood that the following facts had been agreed by both Babylon and HMRC:

Babylon’s only income was from the sale of hay during the relevant period which amounted to £440 per year
Its only customer was ML
Babylon had been VAT registered since 1991 and performed more extensive farming activities whilst ML was the owner
Babylon had previously received management fees from successful businesses run by ML
Babylon’s claim for VAT recovery was in relation to costs which it had incurred on building a new barn. This replaced an outbuilding which Babylon had sold. This had been used to house equipment / machinery for the haymaking activities
The land on which the hay was grown belonged to ML

HMRC’s Statement of Case in response to the appeal confirmed that it was denying VAT recovery of £19,720.50 claimed by Babylon in the relevant period. However, HMRC acknowledged that Babylon had made a VAT-exempt sale of the original outbuildings and that it regarded the livery business as being conducted by ML in his own right.

The decision

In arriving at its decision as to whether the denial of VAT recovery should stand, the FTT looked to the case of Lord Fisher (Customs and Excise Commissioners vs Lord Fisher [1981] STC 238), in which the High Court had identified six criteria which could be used to determine whether an activity constitutes a business.

Those criteria, and FTT’s conclusions regarding Babylon and its haymaking, were:

Was the activity…	FTT’s conclusions re Babylon
A serious undertaking, earnestly pursued?	Yes
One with a certain measure of substance?	Yes
An occupation or function actively pursued with reasonable continuity?	Yes – the activity was seasonal but has been continuous
Conducted in a regular manner and on sound and recognised business principles?	No – ML had fixed the price of the hay and the activity was dependent upon ML’s subjective judgement as to where costs and revenues should be allocated
Predominantly concerned with making VATable supplies for consideration?	No
One with supplies that are commonly made by people who seek to profit from those supplies?	Yes – the supply of hay for consideration was a common activity that was frequently carried on for profit in agricultural businesses

The FTT’s decision was that the sale of the outbuildings had been a one-off capital VAT-exempt transaction. In addition, whilst Babylon owned its own bailer, it was operating on land owned jointly by ML and his wife and providing hay for their livery business.

The FTT therefore reached the conclusion that the activity did not form part of a continuous / regular business; nor was it concerned with the making of VATable supplies for consideration. Accordingly, the VAT recovery should be disallowed.