New use for farm buildings - beware the VAT issues

It is common for traditional farm buildings to become unsuitable for modern farming methods, or for a change in farming policy to result in empty buildings. It may make sense to refurbish these buildings so that they can be rented out for non-farming use, and in this article, we will look at the VAT issues that might arise.

Whenever a farming business diversifies away from mainstream farming, there are likely to be VAT issues. This can either be that VAT has to be paid over on the income generated, or there may be a restriction on claiming VAT on expenses. Traditional farming businesses are in the fortunate position that the sale of crops and livestock are zero rated supplies for VAT, which means there is no VAT charged on sales, but VAT on related expenses are reclaimable subject to the normal rules.

The default position is that the receipt of rent is an exempt supply, which means VAT is not charged on the income, but VAT cannot be reclaimed on any associated expenses. As always with VAT, there are exceptions to this general rule:

• You can make an election to “opt to tax” the buildings, which means standard-rated VAT is charged on the rent, but VAT on expenses can be recovered in full. If any of your prospective tenants are small businesses that are not VAT registered, they will not be able to reclaim the VAT on the rent, and you are at a commercial disadvantage. An option to tax normally lasts for twenty years, so careful thought needs to be given before doing this.
• Since 2012, the provision of storage facilities has been standard-rated, which means 20% VAT is charged on the rents regardless of whether an option to tax has been made. It is therefore essential that you know what use your tenants are making of your buildings.
• A business that is making both exempt and zero-rated supplies, is known as partially exempt for VAT purposes. They are allowed to claim small amounts of VAT on costs related to exempt supplies if the amounts are within the “de-minimis limit.” These rules are complex, but in brief, the VAT on the building improvements need to be less than £625 per month, or £7,500 per year to be reclaimed in full. It is also necessary that the VAT on farm costs is greater than the building costs.
• For larger projects, it can be worth considering using non-VAT registered tradesmen to do part of the work, or to spread the cost over two or more VAT years to stay within the de-minimis limit.

In summary, great care needs to be taken regarding VAT and farm diversifications, and it is essential to take advice at an early stage of the project.