Diversification and VAT: tax implications for farming businesses

Farm diversification is becoming increasingly popular as a means of generating new income, but it is important for farmers to consider the full tax implications that any new enterprise could have on their farming business.

Nottingham chartered accountants Clayton & Brewill explain how diversification can affect your VAT liability.

In years gone by, the vast number of conventional farming business produced only zero-rated supplies, such as agricultural outputs. As a result, these businesses would have been entitled to full VAT recovery on costs, and their reasonably straightforward repayment claims would likely have received little to no dispute from HMRC.

Diversification in a challenging climate

However, UK farming has faced major challenges in more recent years, including increasing globalisation, international competition and price volatility, changing consumer expectations and preferences, accelerating technological innovation, uncertainty of Brexit, and longer-term pressures brought about by climate change. As such, many farmers have had to think laterally in order for their businesses to survive these more difficult times.

diversificationFrom opening B&Bs and farm shops, to using land for fishing ponds, nature reserves, solar farms, or even music festivals, farm businesses are now turning to other forms of income outside the sphere of traditional farming practices, and many are doing so with overwhelming success.

VAT implications of farm diversification

But businesses must note that diversification can have significant implications for VAT. This is generally because, while more traditional incomes sources may be subject to VAT (falling into the standard-rated, reduced-rated and zero-rated brackets), some of these new ventures may have a different treatment for VAT purposes.

This can create somewhat of a VAT minefield that is confusing to navigate, causing considerable uncertainty on the recovery of VAT on costs. For example, if a farmer rents out their land, then this would be an exempt supply, but the inclusion of accommodation or room hire could lead to a VAT bill.

It’s not uncommon for new ventures (e.g. B&Bs) to be set up as a separately owned business for VAT purposes, but this may not necessarily be the best structure when it comes to Inheritance Tax planning. Seeking professional advice in advance of any undertaking will help ensure any tax implications of diversification are fully understood.

If you have recently diversified your farming business into new activities, or are considering it for the future, please do give us a call at Clayton & Brewill – we can help you to understand the implications from a tax perspective.

Specialist accountancy advice for farmers

We understand that for many farmers, farming is as much a way of life as it is a business. We also understand that it rarely fits into ‘normal office’ hours. This is why the specialist farm accountants at Clayton & Brewill are flexible both in terms of how and when we work. Our farming clients know they can contact us for ad hoc, expert advice whenever they need it most. As well as helping with VAT returns, Clayton & Brewill can support you and your farming business in a number of different aspects, from preparing and submitting farm accounts to help with planning capital expenditure.

If you would like to find out more about our specialist accountancy and tax planning services for farms and rural businesses, please contact Doug Perry by email or on 0115 950 3044.


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