Are you getting the input tax relief you are entitled to on your farmhouse costs?
What is input tax?
Input tax is the VAT that a VAT registered business incurs on its business costs. Where a business cost is incurred, input tax may be reclaimed.
As part of a farming business, the farmhouse itself is an integral part of the business. The farmhouse performs a dual role as whilst it is the family home for the farmer, it is also the business hub where decisions are made, office administration is run from and a place of necessary occupation to safeguard the farm and livestock.
Farmhouses are often subject to repairs and maintenance and these costs may be either private or for business purposes. Where costs for repairs are made purely for the business element, tax may be deductible.
Personal or business costs?
But how do you work out what proportion of costs are personal or for business?
A simple way to apportion general repair and maintenance costs for business and private use is to assess how much of the property as a whole is used for business purposes. To calculate this, look at how many rooms the farmhouse has in total and how many of these are used for the business.
Bedrooms and dining rooms/lounges would be classed purely for private use. A kitchen, cloakroom and study could be allocated for business use. In some cases, such as a kitchen, there would be a mix of business and private use and only a proportion of this room could be used to claim for input tax. It would need to be calculated as to what extent the room is used for business. The business proportion is unlikely to be considered more than 25%.
However, should a bedroom be used to provide domestic accommodation to an employee, the cost of this would be attributed in full as business use.
It can be quite difficult at times to calculate an accurate split between the business and private use. As such, HMRC has guidance as to allocations.
For a full-time working farmer, HMRC will accept a claim of somewhere between 40% and 70% of the input VAT, depending upon the size and scale of the farmhouse in relation to the size of the farm.
For a part-time farmer, however, the reclaim is limited to a maximum of 40%.
Permitted expenditure
For any input tax claim, careful consideration needs to be taken that the expenditure is specifically for business use.
Expenditures not permitted:
- costs related to domestic accommodation;
- costs in the pursuit of personal interests such as sporting and leisure orientated activities;
- spending for the personal benefit of company directors, proprietors, partners; and
- spending in connection with non-business activities.
Permitted expenditures include where:
- the expenditure was genuinely made for the purpose of the business;
- the expenditure was not made for private or other non-business purposes; and
- the use to which the purchases are put is an acceptable business use.
For advice and support with input tax for farmhouses, contact Maynard Johns Chartered Accountants on 01237 472071