Does your diversification venture make the farm one business or two?
The typical farming business will normally make regular VAT reclaims as VAT is not payable on sales of livestock and crops while the majority of expenses have VAT charged on them. However where a business undertakes a diversification venture where VAT is charged on sales, the position can change. Albert Goodman Chartered Accountants discusses...
There are rules to prevent artificial separation of businesses to gain a VAT advantage. If two businesses have “close financial, economic and organisational links” they can be deemed to be one business for VAT purposes. This is a fairly vague phrase and not always easy to interpret in the real world.
Following H M Revenue and Customs (HMRC) unsuccessful attempt last year to combine the bed and breakfast (B&B) business of Mrs Forster and the farming business of Mr and Mrs Forster and their son for VAT purposes they have since been successful in the case of H R Patrick and J R Patrick(TC1699).
This case involved a husband and wife farming partnership which also included a haulage enterprise and self-catering holiday accommodation. The partnership was registered for VAT.
The wife ran, in her own name, a B&B business from the farmhouse. As the turnover from this business was below the VAT registration threshold she did not register for VAT.
The First-tier Tribunal agreed with HMRC that the two businesses should be combined as one single taxable entity and as such VAT should be charged on the B&B income. The reasons in HMRC’s favour were as follows: –
- The self-catering accommodation was advertised together with the B&B on a single website, presented as one business.
- The self-catering accommodation was run from the same property as the B&B.
- There was one insurance policy covering all the enterprises.
- Each business had a bank account but they were both in the joint of the husband and wife.
Unfortunately this was quite a clear cut case with the taxpayer not having any argument or commercial reason behind the split. Having the self-catering accommodation in the partnership but advertising it together with the B&B on the web site was a clear illustration of the artificial split done purely to save VAT.
If you are splitting businesses attention to detail is crucial if you are to be successful. The two businesses must in reality be separate with no interdependence and clear and correct invoicing and banking and separate management.
On the positive side, for H R and J R Patrick, output VAT was only payable by the business on the future B&B income rather than on a retrospective basis.
Another win for APR
To achieve agricultural property relief on a farmhouse it must be agreed that the farmhouse is agricultural property and that it is of a character appropriate to the agricultural land. The legislation is not clear on what agricultural land can be used to apply the character appropriate test i.e. whether the nexus between the farmhouse and the property to which it must be a character appropriate should derive from common ownership, common occupation or both. Following the case of Rosser v Inland Revenue Commissioners [2003] another case, Hanson (as Trustee of William Hanson 1957 Settlement) [2012] TC 01791, has tested the arguments.
In Rosser common ownership was accepted by the Special Commissioner for the application of the character appropriate test and it was agreed that the nexus between the buildings and the property is that the buildings and the property must be in the estate of the person at the time of making the disposition. The property would include rights and interests of any description.
In Hanson the deceased owned a half share in 36 acres which was farmed by his brother. He also owned a farmhouse which was occupied by his son. His son owned and farmed 128 acres. In this case the Tribunal agreed that the farmhouse was in common occupation with the land owned by the deceased’s son and this land could be used for the character appropriate test. Therefore the Tribunal held the nexus is only occupation and ownership is not required. This decision goes against that of the Special Commissioners in Rosser.
However, this win for the taxpayer does help to widen the scope to claim APR and assists those that have downsized their farm, moved out of the farmhouse, and given away much of the agricultural land. We understand the case is to be appealed.
