Business Clinic: Will residential investment affect my VAT?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s experts can help. Here, Mary MacLachlan of Duncan & Toplis advises on the VAT implications of buying houses to let.

Q. I am an arable farmer and am looking at different business ventures in order to generate more income. I am thinking of buying some cottages to rent out on residential lets. I am presuming this will not affect my VAT registration and I can continue not paying any VAT to HMRC and reclaiming all the VAT on my expenses. Please advise.

The grant of any interest in or right over land or of any licence to occupy land is exempt from VAT. Therefore, the renting of cottages on residential lets is exempt from VAT.

This will mean that you cannot charge VAT on the rents received from residential letting of the cottages.

However, given that you are now making exempt supplies you are classed as a partially exempt business. This means you cannot reclaim input VAT on expenditure incurred on your exempt supplies unless the exempt input VAT is classed as what is known as a de minimis level.

See also: Business Clinic – options for business handover   

To be de minimis, your exempt input VAT can be no more than £7,500 a year and no more than half of total input VAT incurred by the business.

This also includes general overhead expenditure incurred in relation to the whole business which must also be apportioned between your exempt and taxable income to determine whether you come within these de minimis limits for full VAT recovery.

However, if you decide to rent the cottages out as holiday lets these are not classed as residential lets.

Supplies of holiday accommodation are standard-rated supplies and 20% VAT would need to be charged on this income.

However, it would mean that you could reclaim all your VAT because you are making fully taxable supplies rather than any exempt supplies of residential lets.

In summary, by deciding to have this new business venture you will have to first determine what the VAT liability of your income is, so whether it is taxable or exempt, and then determine what VAT you can reclaim and consider whether you may have to do a partial exemption calculation.

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