We rent out farm buildings. Should we charge VAT?
Answered by Greg Mayne, VAT specialist, Reeves & Neylan, Canterbury, Kent
Different VAT rules apply, depending on whether it’s rented domestic property or commercial property.
Renting out a property is normally an exempt activity for VAT purposes, but the situation may be different for commercial properties.
If the properties are farm cottages or houses, the income will be exempt from VAT.
In certain circumstances VAT may be recoverable on farm cottages when they are occupied by employees essential to the running of the business, such as tied cottages for stockmen.
If the properties are not housing essential workers, then VAT on costs may not be recoverable in the first instance as it would be VAT relating to an exempt activity.
If the properties are commercial, such as barns or packhouses, then the rental income will still be exempt from VAT but with the potential to be transformed into VAT-able income.
This comes about as a result of the making of an “election to waive exemption”, which is more commonly known as an “option to tax”.
By exercising this option a business can make the income from (and any future use or disposal of) the property subject to VAT at the standard rate.
This means that VAT would be charged on the rent, and that VAT on expenditure such as repairs or professional fees in relation to the property would be recoverable.
Opting to tax is relatively simple, but HM Revenue and Customs has to be notified.
The repercussions are that the designated property is deemed to be VAT-able for a period of 20 years following the option.
Also, adding VAT to the rent or selling price may make the property unattractive to tenants or purchasers who are unable to recover any VAT charges.
Is there a recommended length of term for a Contract Farming Agreement (CFA) and do we need to include a clause on cross-compliance in the agreement?
Answered by Richard Levin, partner, Brown & Co, Bury St Edmunds, Suffolk
The usual length of term is three years, though this can be brought to an end by either party provided that there is a reasonable notice period within the terms of the agreement.
These agreements have changed over the past 10 years in that both farmer and contractor have had to recognise the level of return the other party requires to carry on with the contract.
This has in effect meant the farmer having to accept lower payments from the agreement and contractors taking a more realistic approach to their actual costs, often higher than they think.
The introduction of the single farm payment has meant that good communication between the parties has become even more important.
The farmer, who will always be the SFP claimant, needs to demonstrate regular and frequent involvement in making decisions for the business, showing he is taking risk and not simply receiving rent for the land.
These agreements are still based on two key elements — trust and reasonableness.
In this respect, there is now more willingness to review existing agreements, sometimes before their term is up for renewal.
You are right to be concerned about cross-compliance.
Both parties will need to observe the cross-compliance rules and protect themselves in the agreement against breaches by the other party, because SFP is at stake.
The farmer’s position against breaches of cross-compliance by the contractor can be covered by a general indemnity clause in the agreement providing for reimbursement of any loss of SFP to the farmer as a result of the contractor’s failure to cross-comply.
The farmer also has an obligation to observe cross-compliance as this covers land not only in the contract farming agreement but all land under the farmer’s control.
Therefore a clause needs to be included to cover the farmer’s cross-compliance obligation.
My father-in-law wants to gift a plot of land with potential planning permission valued at £120,000 to my wife.
It has been suggested by his accountant that the land is transferred into a discretionary trust to avoid or defer capital gains tax. After a period of time the trust could then sell the land.
My wife and daughter, as beneficiaries, could benefit from the trust either as income or capital payments and the idea is the trust money would be used for our daughter’s further education or family holidays.
Is this the right course of action? Are there any major drawbacks to using trusts? Can the beneficiaries be the trustees?
Answered by Paul Davies, associate, Addleshaw Goddard, Manchester
In a case like this a gift into a discretionary trust may be an appropriate strategy, since the gains can be held over, thereby deferring any liability to capital gains tax.
However you still need to assess whether the family is likely to save tax overall, bearing in mind the following:
Your father-in-law needs to survive the gift by seven years to avoid having it brought into account for inheritance tax in his estate;
The value of the gift for inheritance tax purposes will be the value of the land at the time the gift is made – any subsequent increase in value is ignored;
The capital gains tax payable on a sale by the trustees will probably be greater than the amount your father-in-law would have paid, because any capital gains tax taper relief accrued to date will be lost and the trustees will have a smaller annual exemption;
The land will be re-based to market value if your father retains it until death, thus effectively wiping out any gains.
There may be scope for saving income tax in future if the trust income is paid to beneficiaries who pay tax at lower rates than your father-in-law.
A proper assessment can only be made by looking at the family’s individual circumstances and making reasonable assumptions about what the future holds.
A claim for holdover relief can be delayed for six years so you can wait and see whether it is better to make the claim or not.
Although one or more of the beneficiaries can be a trustee of the trust, it is often considered appropriate for an independent trustee to be appointed as well to look after the interests of the other beneficiaries.
There is a certain amount of administrative work required to ensure the affairs of the trust are properly run.
I have been approached by some people wanting to rent a roadside Dutch barn to use for making and assembling things they hope to sell. If I were to agree, would this attract business rates and if so, who would be responsible for these?
Answered by Jonathan Cheal, head of agriculture, Thring Townsend, Bath
The change of use of the barn will give rise to a claim for business rates, payable by the occupier (though farm diversification relief of 50% may be available depending on the circumstances).
The change of use will also require planning permission.
This is also the occupier’s responsibility, though you as lessor will want to ensure it is in place before the letting starts.
You must then draw up a contracted-out lease under the 1954 Act, and complete it before granting possession.
Get the plan right, and think about access and covenants:
You will want as much control as possible on how the tenant uses the barn, and how he gets to and from it (keeping back a strip of land between the barn and the road will help to assert control, though this will not be an answer in itself).
Rent needs to be thought about carefully.
You may wish to link it to the turnover of the business.
Take care over the rent review provisions.
Think also about insurance and repair clauses:
You will want to put these on to the tenant.
If the barn is within a tenancy already (ie if you are tenant rather than freeholder), written consent will be needed from the head landlord to the sub-letting.
This must be obtained in writing in advance.
The head landlord may well want to have a cut of the rent as consideration for granting his consent.
If you are the owner but your title is subject to a mortgage, mortgagees’ consent to the letting will be necessary.
You will also need to check the tax position carefully.
Until now the barn will have been occupied for agricultural purposes, but it looks as if this letting will take it outside the scope of agricultural occupation, in which case there will be an immediate concern about inheritance tax and loss of agricultural property relief.
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