VAT recovery on farm, buildings, farmhouses and cottages

Published on 18th March 2019

Some farmers dealing with their own VAT affairs may be losing out on input VAT claims.

Farm cottages
Where farm workers occupy farm cottages completely free of rent, because they are working wholly for the business, then the business can reclaim all input VAT on expenses it incurs for the farm worker’s cottage.

If a small rent is charged to the farm worker (perhaps for legal reasons), HMRC will consider the expenses partly attributable to the exempt letting activity. Then the input VAT should be included in the partial exemption calculation as residual input tax.

If a farm cottage is to be let out at a commercial rent, future expenses will be wholly attributable to the exempt letting. Care is needed in the timing of major expenditure and any change in usage intention, so that VAT recovery (and potentially also income tax deduction) is not sacrificed. This might involve undertaking some works before the change in use. Alternatively, dividing expenditure across a VAT year end might increase the scope to reclaim input VAT on property letting expenses under the de minimus rules.

HMRC generally allow 70% of input VAT to be reclaimed when structural repairs are undertaken to a typical farmhouse which is the centre of operations on a full time working farm. Where the works are of an improvement nature, then HMRC will only allow 40% of the input VAT to be reclaimed.

Less VAT is reclaimable for houses which are not full time traditional, working farmhouses.

Consideration must also be given to the nature and use of the works. VAT cannot be reclaimed on works relating to areas which are wholly private (e.g. bedrooms and bathrooms).

Many farmers are converting redundant farm buildings to dwellings. Many of these works are eligible for the 5% ‘reduced’ rate of VAT (and some new build projects may even qualify for zero rating).

The 5% rate applies for a conversion to residential use, or alterations which change the number of dwellings, or renovating/altering dwellings that have been empty for more
than 2 years.

Only ‘construction services’ (i.e. a contractor’s work on the building) qualify for the 5% rate. Professional fees, as well as materials bought on their own, are always chargeable at 20%.

By default, many builders will charge 20% VAT if not instructed otherwise. It is important to ask the builder to charge 5% (where eligible) because of the cash flow benefit
and because HMRC could disallow your reclaim if you have paid 20% VAT when you should only have paid 5%.

If you are considering a residential building project, please ask us for early VAT advice.

For assistance with VAT recovery, please contact us on 01392 211 233.