August 01, 2022

Article

Introduction

Traditionally, and generally speaking, the core activity of farming has been relatively straightforward from a VAT perspective.

The majority of sales have been of foodstuffs, generally qualifying as zero-rated. No VAT is due on the sale, but VAT on related expenses can be reclaimed by a VAT registered farmer.

VAT on expenses is normally reclaimable to the extent that the expenditure relates to taxable supplies a business makes or intends to make. “Taxable” supplies include sales of zero-rated food, or standard-rated sales of say, wool, but not supplies that are exempt from VAT. Where a farm business receives VAT-exempt income it may not be able to reclaim all the VAT on its expenses.

For VAT purposes a grant is not consideration for the supply of goods or services and is typically ignored. A “farm” where the only expected income is from agricultural grants - e.g. Countryside Stewardship - may have no right to reclaim any VAT as it is not making, nor intending to make, any taxable supplies.

This is not the same as say an early-stage farming business that needs grants/donations/ loans to survive until it has a saleable crop some years later. (Forestry, or viticulture, perhaps.) Such a business can still register for VAT and recover VAT on the development costs on the basis it has a firm intention to make taxable supplies of timber/wine in the future.

More generally, a farming business intending to use its land to generate new, diversified income will need to identify the nature and VAT treatment of the supplies it will make and the potential impact on VAT recovery.VAT is highly fact sensitive, and a slight change in the fact pattern can make a major difference to the VAT treatment as the example of the letting of an agricultural building in the next section demonstrates.

Land and Property

Dealings in land and property are particularly complicated, as much income from property is VAT exempt, and unless sums are relatively small (“de minimis”) VAT cannot be recovered on expenses referable to generating income that is exempt from VAT.

While the grant, assignment or surrender of an interest in, right over or licence to occupy land is normally exempt from VAT there are exceptions.

A rent from letting a barn to a neighbouring farmer to use as a workshop is likely to be VAT exempt, but the owner can “Opt to Tax” some or all of its land or buildings. Having done so the owner is obliged to charge VAT on (subject to limited exceptions) any sale or letting of the Opted land for at least 20 years.

But if the neighbour is using the barn to store his goods in, the owner should charge VAT, even if it has NOT opted to tax; unless the goods are livestock. As the VAT treatment will depend on the tenant’s use, any lease or license should require the tenant to notify the landlord if he starts using a facility for storage or permits someone else to do so.

Other exceptions to exemption include bed and breakfast charges, holiday lettings, camping and car parking. Income from a grazing licence is typically seen as the provision of animal feed (i.e. grass) and as such can be zero-rated.

The devil is in the detail, then?

Yes, but if we are asked to advise at an early stage, we may also have scope to influence the detail to secure the optimum VAT treatment. By way of example, we were recently asked to comment in relation to a proposed woodland planting agreement. The landowner had been approached by a large business that had a legal obligation to deliver a substantial area of tree planting.

The landowner did not appear to be granting an interest in the land to be planted, nor would the large business be
entitled to fell and sell the timber.

Instead, the landowner appeared to be agreeing to planting trees at the large business’ cost. The landowner would be able to sell the timber, but it appeared that it would have to accept the corporate’s instructions on species planted; planting density, etc. which might not have been its first choice if growing the most commercial crop was concerned.

This might perhaps be positioned, and the contract written to reflect:-

1. the payment of a grant to the landowner by the large corporate; or
2. the standard-rated supply by the landowner of accepting an obligation to plant trees only in accordance with the large corporate’s specifications.

In our view, 2 was preferable, in particular to secure input tax recovery on planting costs; and to minimise the scope for challenge by HMRC; provided that the large corporate would agree to pay an agreed sum plus VAT in addition.

Conclusion

VAT is a tax on transactions. To understand the VAT implications of a major change to a farm’s operations it is important to identify the detail of how the transactions will work; and consider the optimum VAT treatment available on the facts.

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