VAT - partial exemption and farming

For any VAT registered farming business it is important to be sure that the correct VAT treatment is applied to all of the activities undertaken. Not only does this mean that VAT can then be correctly declared on any standard rated or reduced rated sales but it will also mean that the farm’s VAT accounting can then maximise the recovery of the VAT it incurs on its purchases and expenses.

Partial exemption is a feature for those farms which have a mixture of taxable and exempt business activities. In this context taxable covers the supplies made which are zero rated, reduced rated or standard rated for VAT purposes, for example sales of crops, livestock, sales of electricity and contracting. For most farms any VAT exempt business activities will come in the form of property rentals i.e. residential lets or the letting of non-residential property which is not subject to an option to tax.

Whereas the VAT incurred on any costs associated with the taxable business activities can be claimed, the level of any VAT incurred in respect of exempt business activities has to be monitored as it can only be claimed where it falls below certain limits. These are the partial exemption de minimis limits – where the VAT incurred on costs attributable to the exempt activities has to be less than both £625 a month on average and less than 50% of the total input tax figure for it to be claimed.

There are some simplifications to the process but the basic position is that any farming operation that has exempt business activities will have to consider how partial exemption affects its VAT recovery. Partial exemption calculations will usually have to be carried out for each VAT return and are also subject to an annual adjustment at 31 March, 30 April and 31 May depending on when the VAT returns end. Any adjustments required to the input tax claimed during the year are taken into account on the first VAT return for the following year.

This is an area that HMRC will look at on a compliance check and there is scope for mistakes to be made which in turn can lead to an assessment for the VAT involved together with interest and penalty charges. Common mistakes are that the VAT incurred on costs relating to exempt supplies are claimed or that the VAT incurred on general overheads are not apportioned to reflect their taxable and exempt elements.

Anyone affected by partial exemption should review its arrangements and expected spending at the earliest opportunity to ensure that it can comply with the provisions and, just as importantly, carry out the required planning to ensure that wherever possible it can take advantage of the de minimis limits.

If you require any specific advice in this area or assistance with the mechanics of your partial exemption calculations please contact Andy Branson or Richard Taylor.