Frank Smart, of Torphins, had been embroiled in a court battle with the tax body for a number of years.
But judges ruled in agreement with Mr Smart that he should not have paid VAT on a £7.7 million transaction to buy more than 34,000 units of land.
Under EU regulations, farmers could trade in units of single farm payments for land they were not farming. The units were issued by the Scottish government in accordance with the EU single farm payment (SFP) scheme, which makes provision for the payment of agricultural subsidies.
In today's judgement, the Supreme Court told HMRC that Mr Smart was entitled to a deduction of VAT because he bought the units in support of “current and planned” economic activities, namely farming and a windfarm.
The judgement document said that FASL had taken advantage of the market in SFP units to accumulate a fund for the development of its business, on which it had paid VAT.
It said: “In this period FASL paid VAT on the SFPE units which it purchased and it has sought to deduct that VAT as input tax.”
Lord Hodge, in agreement with Lord Reed, Lord Wilson, Lord Briggs and Lady Arden, said: “I recognise that a claim for deduction which depends on the future behaviour of the taxable person, such as the claim in this case, may create practical difficulties for HMRC in administering the VAT system fairly and, in particular, in avoiding unwarranted repayments of VAT. But it is an established part of the VAT system that a taxable person is entitled to an immediate deduction of the VAT which it has paid.”
Mr Smart owns and is sole director of farming business Frank A Smart & Son Ltd (FASL) and also runs a farm with his wife, which is leased to the main company.
HMRC previously refused to allow Mr Smart’s company FASL to deduct VAT more than a million pounds in its tax returns between December 2008 and June 2012.
FASL previously won an appeal against the HMRC, with Mr Smart arguing that the money claimed back would be used to pay off his company’s overdraft and also invested in growing the business.
A HMRC spokesman said: “We’re disappointed with this decision and we are considering the terms of the judgement and its implications.”