VAT and farm diversification
When a business is VAT registered the registration covers all the taxable activities of that business. For most farming businesses VAT registration results in refunds from HMRC as traditional income streams such as the sale of crops and livestock are zero rated.
VAT charges on diversified activities
Over recent years many farms have diversified from their traditional activities to supplement their income. Common
diversification activities include letting of property as holiday accommodation, camping and caravanning facilities, arts, crafts and gift shops, sale of firewood and kindling etc. However, the majority of these additional activities, such as those listed above, are taxable at 20 per cent (firewood is chargeable at 5 per cent if sold as such and not intended for resale by the purchaser).
A VAT registered business should always consider additional income sources, charge and declare VAT where appropriate. During a VAT inspection the officer will usually ask about miscellaneous income sources, inspect the premises and review accounts to identify any additional taxable income.
Often these additional income streams, when taken into consideration on their own, fall below the VAT registration threshold. As such there could be the temptation for these activities to be split from the farming business and undertaken by a different legal entity.
For example, the farming of crops and livestock is undertaken by the husband as a sole proprietor and the camping and caravanning and gift shop is run by his wife, also as a sole proprietor.
This initially seems to make sense, as the VAT registered farming business is in a repayment position whereas, the camping business, which would be taxable at 20 per cent trades below the VAT threshold so doesn’t need to VAT register.
However, HMRC may consider this arrangement to be artificial, especially if the business had previously traded as a partnership.
The splitting of a business to take advantage of the above scenario is known as disaggregation. If HMRC consider that disaggregation has occurred then they can make a ruling and issue an assessment for the VAT they consider has been avoided.
In making this decision they will look at the operation of the business and if it is apparent that it is in fact one business, not two, the ruling will be made.
Structuring new business activities
When taking on new activities, if it can be demonstrated that they are undertaken by a different legal entity and there is an ‘arms length’ commercial relationship then it may be possible to structure the business arrangements differently.
For example, the operation of a gift shop could possibly be operated under a different entity if a commercial arrangement was in place to let premises and it was operated as a separate business. In instances such as these separate bank accounts, business accounts and minimal crossover of staff should be demonstrated.
Before considering the VAT treatment of any new activities it is important to obtain professional advice to ensure that VAT regulations have been adhered to. The above is only a summary of the issue and arrangements should not be entered into solely based on this article.