There is a fine line between business farming and hobby farming and a risk that anyone farming where there is any measure of doubt may find HM Revenue & Customs (HMRC) disagreeing with their own view.
Any farming business owner needs to be certain of their position:
“No doubt there are people who see themselves as farmers who have chosen to take that route as a lifestyle choice. There are others who may have another job and only devote a part of their time to the farm. And there are those who don’t run the farm as a business or set out to make sales on any significant level at all.
“Recovery of VAT can be a critical test, and this will not be permitted if there is no direct correlation to the making of taxable supplies in ‘furtherance of the business’.”
‘Furtherance of the business’ can encompass profit motive, continuity, organisation and seriousness/commitment to conducting a business activity. Running such activity at a sustained or significant loss is unlikely to be compatible with generally recognised business principles.
“The confusion can be exacerbated in the farming sector, particularly because in farming generally there may be lengthy periods where very little income is generated, and the intention to make business sales is vital to permit VAT recovery.”
So, what questions should be asked to recognise whether you farm within this marginal area and are therefore at risk of HMRC querying that you are farming as a business?
- Are you registered for VAT? Where you incur VAT on for example farmhouse costs, equipment, feed, fertilizer, repair and maintenance then it is beneficial to be VAT registered provided that it is your intention to make business sales.
- Do you employ staff so that your own involvement is only on a part-time basis and /or do you have another earning occupation that provides your income?
- Are you making taxable supplies on a regular basis and is the purpose of your farming activity to make such sales?
- Does your farming activity run at a sustained, significant loss?
Being totally clear about your response to these questions will determine whether you are indeed farming for business, and therefore can be legitimately VAT registered, or farming for lifestyle or other motives, when justification for such registration may be less straightforward.
Where VAT registration occurs and VAT is claimed on costs/outgoings but there is little or no evidence of sales being generated, then HMRC may consider investigating your affairs, and being well prepared with evidence of business activity is absolutely vital.