VAT and farms: the implications of diversification
The continuing trend for diversification
A key trend of the past few years has been the increasing number of VAT issues relating to farm businesses, usually as a result of diversification. As many people seek to reduce their meat consumption, more farmers are likely to start new activities in order to generate income from alternative sources, so this shift towards increased diversification looks set to continue apace.
Historically, farm businesses have been entitled to full VAT recovery on costs whilst having no output VAT to declare, as they are making only zero rated supplies (crops, livestock etc). Their regular VAT repayment claims have often been refunded without question, as HMRC fully expect traditional farming businesses to be in a net repayment position.
How VAT implications can be overlooked
It might be the case that the VAT implications for a particular farm continue to be straightforward - with agricultural outputs (sales) being zero-rated, full input tax entitlement and private use (telephones, car, farmhouse repairs ) being debatable. But it is unlikely to be that simple! Our experience is that very few farm businesses remain making only zero rated supplies: most have moved away from the pure trade of farming into many different activities.
New income streams may include activities that are subject to VAT (standard rate or reduced rate), or VAT exempt activities. So not only can there be VAT output tax to be declared to HMRC, there may also need to be consideration of the VAT partial exemption rules and these are often overlooked. For all these reasons, whenever a farm business embarks upon new business activities, it is hugely important to consider the VAT implications.
The danger of ‘careless’ errors
Having said that, many farm businesses will not necessarily have had a VAT inspection for years and may just drift into new lines of business without fully considering the consequences. If VAT errors are made, perhaps continuing for a number of years, HMRC can impose assessments and penalties. What’s more, the ranges of penalty rates are higher for careless or deliberate errors, compared to circumstances where reasonable care has been exercised.
VAT returns: as easy as pressing a button?
At a recent meeting a client declared confidently: “I do the farm VAT returns through Xero; it’s easy. It’s done at the touch of a button!” However, many accounting software products do not cater for partial exemption calculations. In addition, businesses will often miscode income as zero rated or “no VAT” when it is in fact exempt income. So it’s easy to see why the VAT return process does need a little more thought than just pressing a button!
How you can help your farming clients
A partial exemption review and calculation will often need to be done outside the accounting software, with an adjustment entered through the accounting software before the VAT figures are submitted to HMRC. Such calculations will only be accurate if the VAT coding of income is correct and the VAT incurred is coded to reflect the attribution. In Xero, for example, input tax analysis can be done by using category tracking.
Diversification can lead to many different VAT implications so it is important to ensure that there is an awareness of these in advance, or there may be a nasty surprise later, particularly if VAT issues are picked up by HMRC on an inspection.
What needs to be considered?
- VAT issues
These include: VAT liability of income; recoverability of input tax; partial exemption and planning, particularly for large value transactions, such as building developments and promotion agreements.
- Income streams
Supplies of food, crops and livestock are often the original zero-rated activities. There can often be government/EU subsidies. These are outside the scope of VAT (like a grant) but do not adversely impact on input tax recovery.
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Problem areas
- Non-business/private use
- Rental income – exempt or taxable?
- Storage and parking
- Moorings
- Partial exemption, de minimis check and calculation
- Capital Goods Scheme
- Cars vs commercial vehicles
- Change of use/intention
- Barter transactions
- Share farming
- Disaggregation
- Offsets – auction fees
- Option to tax consideration
- Property conversions – ‘dwelling’?
- VAT on deregistration
- Development agreements
- Camping
- Kennels/cattery
- Filming rights
- Wedding/venue hire
- Catering/tea rooms
- Livery – exempt or taxable?
- Solar farms – is income taxable?
Don’t let your clients sleep walk into VAT problems
Given all these complexities, it is easy for farming clients to inadvertently get into difficulties with VAT. If they are assuming that their VAT return declarations are correct because the software does it all, do put them straight. Get to know your clients. Visit them to see what activities are going on. As soon as you become aware that there is income that is standard rated, reduced rated or exempt, make sure that you advise your client of the VAT consequences. It is far better to invest some time advising your client now, rather than trying to dig them out of a large VAT assessment in the future!
Alison Sampson, Senior VAT Consultant at Knill James. alisonsampson@knilljames.co.uk 01273 480480