5 September 2017

Changing the business purpose of your farm or estate?

If you are making changes to the business purpose or activity of your farm or estate, always remember to check your VAT position.

Don't let changes result in unbudgeted VAT costs

The activities undertaken by farms and estates are more varied and diverse than ever before. Change appears to be constant. While tax and VAT are generally taken into account when new ventures and activities are being considered or planned for, the same care and attention is often forgotten when the original project is changed or altered. This can often result in unbudgeted VAT costs or the failure to spot an opportunity to recover additional VAT.

For example, when a building is constructed or purchased with the intention of being used for farm business, the VAT incurred is normally recovered in full – indeed, the VAT incurred on most farm or estate expenditure would normally be recovered in full. However, where there is a change in the business purpose or activity, such as leasing the farm properties to a third party, the original VAT recovery position can be affected. As the rental of property is normally exempt from VAT, if a property is never used for VAT-able activities or if the building costs are more than £250,000, the VAT originally incurred and recovered (or an element of it) must be repaid to HMRC. This can result in additional costs. Action can be taken to secure the original recovery of VAT, however, this needs to be identified as soon as the original business intention changes.

Another example of change involves windfarms. When a windfarm is being planned and developed, the intention is normally to use it to generate and sell energy or to provide a facility that can then be sold or rented to an operator. In these cases, the VAT incurred on the planning and development costs is usually recoverable in full. However, another option is to sell the company that owns the assets of the windfarm. If this happens, the sale of shares in the company are exempt from VAT and, if this is the first supply made, the VAT incurred on set up and development costs may have to be repaid to HMRC.

The moral of the story is: if you are making changes to the business purpose or activity of your farm or estate, always remember to check your VAT position. It’s easy to get caught up in planning the end result in terms of the outlay and potential income when considering alterations to your original plans, meaning VAT is often overlooked. However, the original recovery of VAT should be reviewed when any change occurs that involves assets and expenditure linked to exempt activities (such as supplies of land, property, financial transactions, sporting rights and share sales), personal use and free of charge or non-business activities.

Could you recover additional VAT?

There are two sides to every coin though. As such, it is worth remembering that if VAT is not recoverable at first and changes result in supplies that are liable to standard or reduced rate VAT, it may be possible to go back and recover the VAT that was previously blocked from recovery.

Common activities and arrangements that we find often give rise to a change of intention and the need to reconsider the original VAT recovery position include:

  • Grazing rights, stabling and livery
  • Rental of function rooms or venues (with or without catering and other services)
  • Sporting rights, sporting facilities and event venues
  • Construction of residential accommodation
  • Conversion of business and residential properties
  • Commercial and private vehicles
  • Staff accommodation and dwellings

The issues associated with these activities and the range of possible outcomes will depend on each circumstance and the specific goals of the parties involved. However, so long as VAT is considered at the earliest possible opportunity and regularly thereafter the outcome should normally be beneficial.

If you are thinking about making changes to your current business activities and would like to assess your VAT position, please do not hesitate to contact Scott Craig.

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