Beware VAT charges on new farmhouse builds, warns Old Mill

Farmers looking to build a new farmhouse on their land are increasingly finding that VAT relief is not assured, following a narrowing in HMRC’s interpretation of the rules.

Construction costs for new farmhouses have traditionally been zero rated for VAT purposes, provided the planning consent does not prohibit separate use or disposal of the dwelling, says Mark Peters, indirect tax director at accountant Old Mill. However, HM Revenue & Customs has recently adopted a much more aggressive line on what amounts to a prohibition, hence denying relief on a far greater number of projects.

“Many new farm buildings have some sort of use restriction on them, and farmers need to be aware of the potential impact that can have on VAT,” says Mr Peters. “General conditions, like restricting the occupation of the house to someone working in agriculture, should not affect VAT relief. But any wording specifically linking the new house to anything else, including another building, land, or a particular business operation, is likely to be challenged.”

Tax tribunals have tended to side with taxpayers where a condition refers to occupation of a building, while favouring HMRC if the condition refers to use of the building. “The distinction is therefore a very fine one – but any overt condition specifically prohibiting separate use or disposal is lethal to VAT relief.”

Where VAT is payable, farmers should be able to claim it back through the business. “But such a claim is likely to be restricted to 70% of the VAT paid, under guidelines agreed with the NFU. And as these guidelines cover repairs rather than new builds, it is debatable how much they can be relied upon,” he adds. “It does seem unfair that private individuals building a new home will often get full relief, while working farm businesses are increasingly suffering a VAT cost.”

Many farmers believe they can reclaim all the VAT charged through the DIY Refund Scheme – but they are often mistaken, warns Mr Peters. “Prohibition conditions affect such claims in the same way they affect zero-rating; all the claimant succeeds in doing is alerting HMRC to a possible challenge of zero-rated build costs. And as such refunds are no longer available on farmhouses held as business assets, making a DIY claim looks increasingly inadvisable.”

Someone spending £300,000 on building a farmhouse will incur an additional VAT liability of £60,000 if relief is not available, says Mr Peters.

“We foresee HMRC continuing to take an aggressive line in this area, and are working with the NFU to get further clarification on the issue. Meanwhile, it is important that farmers take professional advice, preferably before applying for planning consent.”