VAT & Storage

To boost income and ensure future viability, farming businesses are increasingly diversifying their farming activities. A useful way of generating additional income is renting unused buildings, particularly as older buildings are often unsuitable for modern farming methods.

While the letting of land and property is normally exempt from VAT, the position with buildings used for storage is likely to be different, even without an option to tax.

The provision of storage facilities is normally standard ratedfor VAT rather than exempt, meaning VAT must be paid on this type of income. Storage facilities include a unit or building, a container or other fully enclosed structure, so would include such things as grain stores.

A key point is that standard-rating can depend on actual use by the tenant. If a tenant is using a building for the storage of goods, it is likely they should be charged VAT. VAT is never straightforward. HMRC say a supply of storage may occur regardless of use if it is implicit in the nature of premises or commercial documentation, such as a lease and the facility is intended for use as storage.

Specifying that a structure can only be used for storage of goods may give some certainty that VAT should be charged but it is vital landlords know how their tenants are using a building. It is well worth ensuring any lease or contract includes a warranty that the tenant will not use the premises for storage or that if they do, they will inform the landlord.

There are certain exceptions including supplies to charities for non-business purposes, storage that is ancillary to a different main use of the building and, of particular relevance to the farming sector, the storage of animals. There is also an exception in very particular circumstances where the landlord and user of the facilities are connected.

Charging VAT on storage may actually be beneficial. In principle VAT cannot be reclaimed on expenses used to generate exempt income. If a building is built or refurbished and the rental income is exempt, VAT on the costs may not be recoverable. If the building is to be used for storage, where the income is taxable, VAT could be reclaimed on costs. Also, if a tenant is able to reclaim any VAT charged there would be no overall cost to them.

It is worth mentioning that providing facilities for parking vehicles, which includes caravans, is also specifically excluded from VAT exemption and is standard-rated.

Businesses that are letting or are considering letting land or buildings need to be aware how the property will be used and carefully consider the VAT treatment.