VAT Pitfalls For Your Farming Business
When VAT was introduced in the 1970s it was described as a “simple tax”. For many farming businesses this may be the case, as all income is zero rated sales of crops and animals, which entitles all the VAT on related costs to be reclaimed.
However there are many instances where modern diversified businesses have VAT issues – either having to pay over VAT on some of their income or not being able to reclaim VAT on all their expenses.
There are five key points as follows:
- In order to reclaim VAT on expenses there must be a link to taxable supplies. A recent case concerning an Aberdeenshire farming business illustrates this point. The business reclaimed VAT on the purchase of a large number of SFP Entitlements. No farming took place on the land rented for the purpose of claiming SFP.In order for VAT to be reclaimed on any expenditure, a business must show that there is a direct link to “taxable supplies” made by the business. Taxable supplies cover most sales made by a farming business, e.g. livestock, crops, machinery sales, etc. but crucially not subsidy income which is classed as “outside the scope” of VAT. The farming business was able to demonstrate to the court that its intention at the outset was to increase farming activities by investing in the SFP entitlements. Thus the business got to keep the VAT.
- In order to be VAT registered there must be some business activity. Another recent case involved a business that had farmed actively in the past but activities had dwindled over the years. VAT returns continued to be submitted and reclaimed on expenses, including the cost of a new building. The only income was £440 of hay sales to a connected business. HMRC argued that the business was not being carried out on a commercial basis and the business should be deregistered. The tribunal agreed with HMRC and the business had to repay £19,720 of VAT.
- Can HMRC treat separate businesses run by husband and wife as a single business for VAT purposes? The short answer is yes – HMRC have powers to deem connected businesses as a single business for VAT purposes. A recent case - not concerning a farming business – involved a husband and wife who ran a restaurant and café in adjoining properties. HMRC argued that because the husband helped his wife – for example the cafe alcohol licence was in his name, the leases of both properties were in his name, and both bank accounts were in his name - that they be treated as a single business. This would have meant that VAT would have had to be paid over on all sales. The couple were perhaps fortunate that the tribunal accepted that there were separate businesses. In a farming context a similar situation can arise with a B&B or holiday letting business. The income of both these businesses are standard rated, meaning if they are run as part of the VAT registered farming business, that 20% VAT has to be paid over. This may not be the case if the diversified ventures are kept totally separate, but great care needs to be taken.
- Can VAT be reclaimed when property is let out? This is known as partial exemption and the default position is that as rent is an exempt supply, VAT cannot be reclaimed on related expenses such as the cost of refurbishing a cottage that is let out. There is a relaxation of this rule where a farming business has significant farming activities and a small amount of rental income and expenses. In simple terms, if the VAT relating to let property expenses is less than £625 per month and less than 50% of total VAT incurred, then all can be reclaimed. The rules here are complex, so care needs to be taken.
- Can VAT be reclaimed on cars and commercial vehicles? This is a complex area, so I’m only able to cover this in brief. The first question is to decide whether the vehicle in question is a car or commercial vehicle. This is determined by questions such as whether there are side windows or seats behind the driver’s seat, whether it has an unladen weight of more than 3 tonnes, or has a payload of at least a tonne. If the answer is that it is a commercial vehicle, then VAT can be recovered subject to normal rules such as a reduction for private use. If the vehicle is classed as a car, recovery of VAT is much more difficult. It is necessary to show that the vehicle is exclusively used for business purposes and is not available for private use. This is not easy to prove in a family business.