In a recent article published in the Dundee Courier, our Agri Partner, Mark Gibson, explores taxing issues for diversified farms.
As the flurry of spring work subsides attention now turns to farm bookkeeping, namely the completion of the next VAT return. The task is made less onerous by virtue that this return is likely to be a substantial repayment, as it includes VAT on expenses such as spring fertilizer.
VAT for farm businesses has historically been straightforward with the majority of income being zero rated and almost full recovery of input VAT.
However, where the farm has diversified, the VAT treatment becomes more complicated and thought needs to be given to the various income streams on farm and to classifying them as taxable or exempt.
A farm will fall within the scope of partial exemption when it supplies both taxable and exempt services. Output VAT can not be charged on exempt supplies and as a result any input VAT relating to making that supply cannot be recovered.
The most common exempt supply on a Farm is in relation to VAT on land transactions. Without an option to tax (not covered in this article) which is generally the default position, letting income streams are VAT exempt. The three most common exempt income types are DIY livery, renewable energy agreements (whereby the farmer does not own the asset and is simply granting rights over land) and the letting of farm cottages on a commercial basis. Cottages let rent free to farm workers still benefit from full input VAT recovery.
Many farmers have a diverse income stream and therefore should be aware of the partial exemption rules. The first step is to work out how much input VAT the farm can recover. If all the VAT relates to taxable income, then the farm can reclaim it all. If all the input VAT relates to exempt income, then it is not recoverable (subject to de-minimis rules discussed below). Once this calculation has been carried out there will usually be VAT left over which can’t be attributed directly to either a taxable supply or exempt supply. For example, accountants’ fees relate to the business, not directly to one income stream. This is known as residual input VAT.
A farm subject to partial exemption must use an approved method for calculating how much of its residual VAT it can recover. The standard method calculates this recovery based on the split between taxable and exempt turnover. So, for example, if a farm had total turnover of £60,000 in a quarter of which £20,000 related to a wind turbine lease (exempt), then 33.33% of any residual VAT would not be recoverable.
However common sense has prevailed in that HMRC accept that where exempt related input VAT from both the direct method and through the residual calculation, is below a de-minimis limit then all VAT can be recovered. Two conditions must be met in order to be below the de-minimis limit. Firstly, Input VAT incurred in relation to exempt supplies must not exceed £625 per month or £7,500 annually. Secondly the total input VAT attributable to exempt supplies must not exceed 50% of total input VAT. The result of which means that farms can spend up to £37,500 annually excluding VAT on items relating to exempt income sources. However, should the farm spend £38,000 excluding VAT in one VAT year then the full amount of input VAT is lost. It is an all or nothing calculation.
Care is therefore needed over the timing of major expenses relating to let farm cottage renovations. It may mean dividing refurbishment expenditure over two VAT year ends to increase the ability to reclaim input VAT under the de-minimis rules
Whilst it is understandable that the VAT focus over the past year or so has been on Making Tax Digital, VAT traps still arise for the unwary and advice from a qualified accountant should be sought.