Claiming input tax on farm buildings

Cottages

Where cottages are occupied by farm workers working wholly for the business, carrying out farming activities and living there in a rent-free capacity, then the input VAT on expenses in relation to the farm worker’s cottage can be claimed. If, however, the work carried out by the employee is connected to taxable and exempt activity supplies, then the input VAT should be apportioned or included in the partial exemption calculation as residual input VAT. As part of tax planning considerations, if a cottage is to change use and be let out, the timing of this needs to be considered and maximum use should be made of the farm worker status.

Farmhouse

In regard to farmhouse repairs, up to 70% of the input VAT on repairs can be recoverable on the house if the following conditions apply:

• the business comprises of full time farming activity;
• the house that has had the repairs is a typical farmhouse; and
• the work carried out is only for repairs and not the improvement or maintenance of the house.

However, HMRC generally will allow and accept up to 40% of the repairs to be recoverable if some of the above conditions are not met, with the amount recovered being related to the facts of each individual case. In each scenario it is important to consider the works that are being carried out and how the farmhouse is used by the business before making the claim.

Buildings

With the move to converting farm buildings, it is important to note that work completed to convert commercial buildings to residential accommodation qualifies for a special 5% VAT rate. It is essential the right rate is charged as only 5% is recoverable even if the contractor applies the full rate in their charge. Additionally, the only costs covered by the 5% rate are the construction services, essentially the work carried out on the building.

There are certain services which if supplied direct to the client rather than the builder will be chargeable at 20%, such as hire of equipment and professional fees. Some elements must be treated as standard-rated, such as appliances and carpets, therefore it is essential to plan ahead for all conversions and consider who is contracting and paying which suppliers.

Contributed by Julie Butler, Butler & Co