Be ready for the taxmen – they’re coming, warns specialist Julie Butler of Butler & Co.

Are you prepared for the VAT hit team? Ten years ago, the preparation of the farm VAT return was a relatively easy affair. Generally, all income was agricultural and therefore zero rated and most of the VAT on expenses could be reclaimed.

Nowadays, more cottages are available for rent, barns have converted to residential and commercial accomodation and there is also a vast amount of alternative land use.

Where buildings have been converted for commercial use, there have been various “options to tax”, so all the VAT paid in converting the building can be reclaimed. The result is an extremely complex VAT Return for many farmers.

Income from residential lettings is exempt from VAT. But generally, this means “partial exemption”, which involves some interesting new terminology – “deminimus limits”, “annual adjustments”, “the standard method” and the “use-based method”. If this vocabulary is alien to you, then worry.


HM Revenue and Customs has recently announced they intend to scrutinise VAT-free commercial shoots, and its Norwich-based Shooting Project team claims “an average extra tax take of £19,000 a visit”.

But I believe there are more worries for the farming community through the VAT treatment of cottages and the alternative use of buildings than their involvement in shooting. Have you checked the VAT treatment of new ventures? HMRC has already said it would like to see the shooting project extended to cover farms’ diversified enterprises.

Farming was historically deemed a low risk to the VAT inspectorate and in many cases it is 10 years or more since most farms had a VAT inspection. Is there a nightmare round the corner? And what can farmers do about it?

It would be a cost effective and sensible safeguard for farmers to have a VAT audit carried out by their accountant or adviser.

The review of VAT returns is often not included in the accountant’s engagement letter and if the right VAT questions have not been asked, the answer may not have been given.

Historically, VAT has attracted a level of complacency. But the signals from HMRC are becoming clearer and clearer. So, make a New Year’s resolution: Ask your tax adviser to visit before the VAT inspector does!

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