HM Revenue & Customs eyes diversified farm businesses

Diversified farm businesses are being targeted by HM Revenue & Customs for failing to charge VAT. The authorities can recover up to three years’ back tax as well as charge penalties and interest.

Problems are most common where a diversification claims to be separate from the main farming business with a turnover under £67,000 and is, therefore, not VAT registered.

“If you get it wrong the liability could very quickly outweigh any advantages from diversification. HMRC is pursuing businesses vigorously,” said Robert Hatch, partner at accountant Ensors.

“Unless a proper structure and practices are in place to show the new business is run separately, HMRC often finds that the diversification is part of the farm business, which is usually VAT-registered.” Where this is the case, VAT should be charged on all eligible goods and services, not just those of the core farming operations, he said.

“We have seen several cases where the tax assessed is £18,000-25,000. B&B and holiday cottages appear to be current targets, although shooting is another area where HMRC has been active.”

Farm contracting, hiring sporting facilities like golf courses, caravan and camping pitch fees, and open-farm admissions are other examples where VAT should be charged, Mr Hatch said.

“We took over one case of a holiday-cottage business operated outside the farm business. HMRC felt the connection between the two was too close, as a DEFRA grant to develop the diversification came through the farm. The tax liability with interest and penalties came to about £30,000. With proper advice and planning this could have been avoided. Advertising should support the fact that the businesses are separate. Each should have its own bank account, financial records and, ideally, separate premises and telephone number.”

Where one business benefited from the facilities, staff or equipment of the other, commercial charges should be made, said Carlton Collister of accountant Grant Thornton. “It is important to apportion costs properly. For example, a B&B business which is part of a tenanted farm should pay the main business a fair share of the farm rent for the accommodation and an appropriate share of services such as water, electricity and council tax.

“HMRC may be looking not only for VAT but additional income tax. If the apportionment of expenses is made on a reasonable basis, HMRC will find it hard to make a challenge. But where no apportionment has been made, it will be very easy for them.”

A spokesman for HMRC confirmed it had set up a “rural divers­ification compliance team”, although with no financial target. The aim was to raise awareness of tax obligations, he said.

Diversified enterprises like camping and caravan parks are among theadditional farm activities HM Revenue & Customs wants to examine.

Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

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