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Julie Butler, FCA, highlights a potential VAT problem for farmers.

VAT 'hit team' 

Are you prepared for the VAT 'hit team'?

It is considered by many that a decade ago the preparation of the farm VAT Return was a relatively easy affair.  The income was virtually all agricultural and therefore zero rated and most of the VAT on expenses could be reclaimed.

The new century has seen a lot of change – more cottages available for let, barns converted to residential and commercial use and there is also a vast amount of 'alternative land use'.  Where the building conversion is commercial there have been 'options to tax' so that all the input VAT can be reclaimed.  The changes have resulted in an extremely complex VAT Return for many farmers.

Residential lettings

Income from residential lettings is an 'exempt' supply for VAT purposes.  The result is generally 'partial exemption' which involves some interesting and new terminology – 'de minimis limits', 'annual adjustments', 'the standard method' and the 'use based method'.  If this vocabulary is alien to you then panic! 

With the HMRC documented attack on the VAT on shooting my firm's general synopsis is that there are more worries for the farming community through the VAT treatment of cottages and the alternative use of buildings than their involvement in shooting.  The VAT Shooting Project is a team from Norwich who claim an 'average extra tax take of £19,000 a visit'.

Action plan

Farming was historically deemed a low risk to the VAT inspectorate and it is often at least 10 years since a VAT inspection was undertaken at most farms.  Is there a nightmare in prospect?  What are the action plans that the farmers can take?

The November issue of 'One HMRC' states it 'would like to see the [shooting] project extended to cover other businesses farmers have diversified into to make money'.  Have you checked the VAT treatment of the new money spinners?

It would be cost effective and a sensible safeguard for farmers to have a ‘VAT audit’ carried out by the farm accountants/tax advisers.  The review of VAT Returns is often not included in the engagement letter of the farm accountants and if the VAT questions have not been asked the answer may not have been given!

Conclusion

The conclusion is that the tax and VAT checks have to be carried out and some of the complacency associated with the VAT has to be revisited.  Ask your tax adviser to visit you before the VAT inspector does!