Vat and farm property

HM Revenue & Customs (HMRC) take a special interest in farm property – particularly the farmhouse and the conversion and/or redevelopment of outbuildings.

Different rates of VAT apply to construction works carried out and many different rules relate to claiming back the VAT.

In this article we can only summarise the works that attract the zero per cent or five per cent VAT rates and typical pitfalls on VAT reclaims. As always, timely professional advice based on individual circumstances should be sought in all cases.

Zero per cent VAT

The zero per cent VAT rate applies to construction of new dwellings and to listed buildings that are (or will be converted into) dwellings, provided the works are “approved alterations” which require listed building consent.

Big savings can be made by making small changes, for example, to the pitch or height of a roof so that ordinary repair works, which would normally be billed at 20 per cent can be billed as zero per cent. Again the works must be “approved alterations” which require listed building consent. Care is needed to ensure that the cost of special building materials required for listed building consent is not greater than the VAT saving.

5 per cent VAT

This rate should apply to conversion and repair works to the fabric of the building for dwellings that have either been empty for over two years, or for the conversion of outbuildings into dwellings, or for the conversion of houses into flats (or vice versa).

Caution is advised with the precise wording of planning consents (and council tax records in the case of empty dwellings) as HMRC will almost certainly review these in detail in the event of any query.

Reclaiming VAT

Claiming VAT back on VAT returns is not possible for dwellings to be rented out as residential accommodation. However, it is possible to reclaim VAT for dwellings to be rented out as holiday accommodation provided that VAT will be accounted for on holiday accommodation receipts. “DIY” house builder or converter claims must only relate to residential non business
use as HMRC must disallow any claims that relate to intended business use (such as bed and breakfast).

Farmhouse Repairs

It is almost fifteen years since the NFU and HMRC reached an agreement that up to 70 per cent of VAT on farmhouse repairs and maintenance (but not utilities like gas and electricity) can be reclaimed by sole proprietors or partnerships as business use. This does not apply for domestic accommodation used by company directors or where the works clearly relate to non business use, for example a bedroom extension unless you can persuade HMRC it is for business use. Sadly, one tongue in cheek claim by one farmer that the bedroom extension was used to “dream up future expansion plans” did not succeed!

Please do get in touch if you wish to discuss any points in further detail at any time.

Is now a good time to purchase that new kit?

The Annual Investment Allowance (AIA) is currently £500,000. This means that up to £500,000 can be spent on plant and machinery in an accounting year ending before April 6, 2016 (March 31, 2016 for companies) and the full cost of this can be deducted from the taxable profits of the business.

For most plant and machinery the general writing down allowance is 18 per cent per annum but for certain cars and property fixtures, it is 8 per cent per annum.

Where significant capital expenditure is planned within the next few years then it may be sensible to bring this forward to realise the tax discount now in year one rather than having to wait several years.