VAT to consider with farm diversification


One consequence of the COVID-19 pandemic is that holidays in the UK – or “staycations” – have become more popular than ever. This has come at the same time as the phasing out of the Basic Payment Scheme, which makes the profitability of many upland beef and sheep farms more difficult, and as a result, more farmers are looking at diversifying into farm tourism to support future businesses viability. Here we will look at the VAT issues that should be considered as part of the planning for such a venture:

VAT on income received

The first step is to consider the nature of the income from the new venture, and whether VAT is potentially payable on the income. There are three possible VAT treatments:

  • Standard rated – for example wool sales, contracting work done, sale of machinery, holiday letting income – where 20% VAT must be charged and paid over
  • Zero rated – for example sales of cattle, sheep, milk – where no VAT is charged
  • Exempt – for example rent of residential property and most land – where no VAT is charged

The position with rental income is extremely complicated because there are exceptions to the general rule that rent is an exempt supply from VAT. This means that car parking, storage rents and holiday lettings are all compulsorily standard rated. In addition, a business can “opt to tax” commercial property so that VAT is charged on rents.

The most important point when considering VAT is to look at the nature of your customers. If both parties to a transaction are VAT registered, if VAT is chargeable on an invoice, then one side pays over VAT to HMRC, and the other pays it back. When looking at tourism activities, the customer is a private individual who cannot reclaim VAT. This means there can be an advantage in undertaking this activity in a separate entity that is not VAT registered. However, this means that VAT cannot be claimed on any expenses incurred.

VAT on expenses

The general rule is that VAT is only reclaimable if it relates to either standard rated or zero-rated supplies. A farming business making only zero-rated sales of livestock and crops can therefore claim back all the VAT on expenses. If, however, a business rents out land and cottages, then no VAT can be reclaimed unless an option to tax has been made on the land.

When undertaking property renovations, it is important to ensure the correct amount of VAT is charged in the first place. If an existing dwelling has been unoccupied for two years, an agricultural building is being converted to a dwelling, or the number of dwellings in a building change, then the builder should only charge 5% VAT.

Separate business

If a new venture is set up in a different entity to the farming business, an advantage can be gained by not charging VAT on the income, provided total income is less than the VAT threshold, which is currently £83,000. However, care needs to be taken as HMRC may challenge the arrangement on the basis that a business has been artificially split. Therefore, all transactions between the two business need to be done on an arms-length basis.

VAT on property transactions is extremely complex and specialist advice needs to be taken before the project commences.  

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