Are you getting the tax relief on your farmhouse costs?

The farmhouse is an integral part of the farm business itself fulfilling a dual role: primarily the home of the farmer and their family (a private function), whilst also the place where the business is run from with the office often located in the house. Business meetings are held there, day-to-day decision-making taking place, as well as occupation being necessary to tend to livestock and to safeguard the farm buildings and equipment (business purposes).

When expenditure is incurred on repairs to the farmhouse, there will clearly be both a private element of these costs and also a business element. It is important to note that only the latter costs will be deductible for tax.

Up to the 1990’s the farmhouse costs were apportioned as to 1/3rd business use and 2/3rd’s private use, as if this were a standard allowable proportion.  However, as there was no statutory authority for this fraction, HMRC then required tax payers to evaluate the extent of any business use, which will always be a question of fact and degree in any particular case.

A method of division between the allocation of farmhouse expenses between business and private use can be the ratio of area used for each activity i.e. looking at the total rooms in the farmhouse, how many are used for the business i.e. kitchen/utility room/cloakroom, against the rooms used wholly for private purposes i.e. bedrooms/lounge/bathroom/dining room.  Tribunals will adopt a subjective test i.e. what is the “dominant purpose” why the business has incurred a particular expense.

Farmhouse rents is an area which needs to be reviewed in arriving at a private use adjustment because the rent charged is often charged for the whole of the farm without a separate amount being attributable to the farmhouse itself. The proportion of the rent which relates to the farmhouse will depend on the facts of the case concerned.

An acceptable apportionment between that of the house and the land is:

  1. The difference between the rental value of the farm with and without the farmhouse; and
  2. The rental value of a similar residential properties on the open market.

A land agent may need to be employed to reach these values.

The treatment for VAT does not necessarily follow the same of that for Income Tax. Mistakes are often made, when deciding how much to reclaim. Some will claim 100% – which is incorrect as it does not make any allowance for the private use of the farmhouse.  However, others will not reclaim any- which is also incorrect as it does not allow for the business use of the property.

Given that it is very difficult to calculate an accurate split between the business and private use, the National Farmers Union agreed standard apportionment with HMRC many years ago with regard to repair and improvement costs and these allocations are still used.

In accordance with HMRC’s guidance, if it is a working farmhouse; and farming is the full-time occupation, the expenditure is repair in nature HMRC will accept a claim of input VAT of somewhere between 40% and 70%.

For a part-time farmer however, the reclaim will be limited probably to a maximum of 40% and this would also apply to improvement expenditure. Consideration must also be given to the nature and use of the work. VAT cannot be reclaimed on expenditure to areas which are wholly private (e.g. bedrooms and bathrooms).

The VAT treatment on other farmhouse running expenses (e.g. heating oil, electricity etc) does not follow the same pattern applied to repair and improvement costs. The VAT claim will depend on the actual circumstances and business usage of the expenditure, which should be capable of being evidenced and based upon the underlying facts

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