Farmers with workers’ cottages must be careful not to lose valuable Inheritance Tax and VAT reliefs, rural accountants have warned.
Many farmers provide cottages to farm labourers, which normally qualifies the properties for 100% Agricultural Property Relief from Inheritance Tax.
But in order to qualify, the worker must be engaged in farming duties and required to occupy the cottage in order to fulfil those duties, says Mike Butler, director of rural services at Old Mill accountants and financial planners. “A key requirement is that the worker must be an employee subject to PAYE and not a self-employed contractor.”
One of the attractions of using self-employed contractors is that there are fewer compliance issues to worry about - and there are considerable National Insurance savings, says Mr Butler. “Many farmers therefore prefer to use self-employed staff rather than employees. However, if a farm cottage is occupied by a self-employed contractor, the IHT relief will potentially be disallowed.”
The loss of that tax relief could far outweigh the short-term savings of using self-employed staff, he warns. “Furthermore, a contractor who fails to pay his own Income Tax could claim that the farmer ‘forced him’ to be self-employed, which may result in HM Revenue and Customs recovering the lost Income Tax and National Insurance from the farmer himself.”
The second drawback to providing housing for self-employed workers is that the farmer cannot normally recover any VAT on costs incurred on that property. “HMRC considers that the cottage is no longer used as part of the farming trade because the person in occupation is effectively running their own trade from the cottage.”
VAT is also not recoverable when the farm worker – even if they are employed – is required to pay a rent for the cottage, says Mr Butler. “Often farmers charge a small rent to provide some protection should the tenant leave his employ but remain in the property. This is a perfectly reasonable approach to take but at the same time one must carefully consider the VAT implications.”
