Rural business saved in HMRC business splitting case

A state-endorsed ’assault on the rural economy and small business sector’ has been dealt a blow after a VAT specialist secured an important victory against HMRC.

The ground-breaking ruling centred around HMRC which brought the case against a farmer’s wife running a rural B&B that nearly forced her to throw in the towel. In the resulting VAT hearing, the farmer was defended by CCH Fee Protection, part of Wolters Kluwer, the global information services company.

HMRC attempted to charge VAT on the rural diversification activities of Mrs Danielle Forster who, along with her husband and son, were partners in a VAT-registered farming business.

Since the early 1970s, Mrs Forster ran her own small bed & breakfast business from the family’s Essex farmhouse, while her husband, and later her son, took care of the farm. She was a sleeping partner in the wholly separate farm business.

The B&B had traded well below the VAT-registration threshold (currently £73,000) for decades without ever attracting any comment from visiting VAT officers.

Following the most recent inspection, an HMRC officer – as part of its ’rural diversification project’ - used his powers to compel Mrs Forster’s business to be ’aggregated’ with the farm. This threatened to put an end to the business as she risked losing 20% of her income (by paying VAT) and knew it would be uncompetitive to hike her prices.

The British VAT code rules were designed to avoid ’business-splitting’, whereby a business trading slightly above the threshold would separate their activities so that each business remained below the tax trigger point. This means that a non-VAT registered business can charge 20 per cent less - or achieve much higher margins - than its VAT registered competitors.

Mrs Forster was covered by a ’fee protection’ policy, which paid for all the case costs.

’Gamekeeper turned poacher’ Glyn Edwards, CCH’s VAT litigation specialist, represented the Forsters at the hearing. He successfully proved that HMRC’s officer had reached an unreasonable decision. The officer had exaggerated the importance of alleged financial links between the partnership and Mrs Forster’s business while ignoring the facts which clearly demonstrated that the two were separate.

Glyn Edwards says: "CCH have been asked to defend a number of farming clients facing the same issue, apparently as part of a revenue-raising project organised by HMRC. This judgement will make it much easier to resist HMRC’s attempts to target small stand-alone businesses run by, in this case, a farming family member.

"Since this decision we have already seen HMRC retreat in another similar case in the farming sector which had been the subject of a long dispute. One of the keys to this success was that Mr & Mrs Forster had taken out CCH’s Fee Protection insurance via their accountants. This covered all their legal fees and without this it is unlikely that they would have fought the case, especially as costs cannot be recovered from HMRC - even after an appeal has been won."

"HMRC should never had taken the case this far and defend what proved to be indefensible," adds Glyn. "It also shows that HMRC can push small businesses to tribunals even when it is unlikely to win."