Farm Diversification

When HMRC recently reviewed the game shooting industry it worked with the UK’s leading trade bodies to educate their members on the VAT implications of organised shooting to encourage wider understanding and promote voluntary compliance. The exercise revealed a growing shoot industry as part of a vibrant and wider diversification that has occurred over the last couple of decades. It also revealed that businesses have diversified to exploit new income streams but may not always be alert to the numerous associated tax implications in VAT and Direct tax streams.

Helping taxpayers to understand and meet their tax obligations is a fundamental role for HM Revenue and Customs (HMRC). It’s vitally important that HMRC helps to create a level playing field where those who properly declare their tax are not disadvantaged by those who do not.

Many rural businesses are doing the right thing but they face unfair competition if their neighbours are not. The indications are that tax irregularities may be widespread, not just with VAT, but also with Stamp Duty Land Tax, Capital Gains Tax, Inheritance Tax, Self Assessment, Corporation Tax and PAYE and Benefits in Kind on employees. This may not be deliberate evasion but the industry is in need of tax education in order to get things right.

HMRC is conducting a tax project examining diversification generally and will be seeking opportunities to work with representative bodies to educate taxpayers and encourage voluntary compliance. Now is a good time for businesses to review the tax treatment of their various activities and, if in any doubt, talk to HMRC or seek professional advice where necessary.

What are the tax implications to consider?

• Liability of all income, including that from diversification, should be considered and declared to HMRC. The business income will probably be liable to at least one or all of VAT, Self Assessment Income Tax or Corporation Tax.
• Business activities may be carried on by separate entities and the income of each entity, when taken separately, may fall below the figure of the VAT registration threshold.  However, it may be necessary to treat some or all of the separate entities as a single business entity for VAT purposes under the rules directed against the artificial separation of business activities.
• If you have changed from a partnership to a limited company ensure that you understand your new obligations.
• Consider the PAYE and Benefit in Kind implications of all payments and non cash remuneration especially if you engage workers in your diversification business.
• It is important to establish who owns what and whether farm assets are used partly for private purposes or by another entity for its business.  Where no commercial charge is made you need to ensure VAT is correctly dealt with as you cannot recover input tax on costs if no output tax is paid.  You should consider carefully how such arrangements are dealt with in the accounts so that your income or corporation tax position is correctly calculated.  If the asset is used by an employee you should consider if there may be a benefit in kind. 
• Overhead costs should not be put through the farm accounts with VAT input tax claimed but no charges raised to, or payment made by, the “associated” entity.
• Ensure costs are not claimed on private or non-business expenses.
• Is your business applying the correct VAT rate to all the income? For instance, VAT is due at the zero rate for sales of food crops but fuel crops and by-products are liable to VAT at the standard rate.
• Income from land and property may be exempt from VAT. But, with certain exceptions, it raises the possibility that VAT incurred in making that supply may not be claimable.
• Assets that are not part of the farm may not be exempt from Inheritance Tax.

HMRC's aim is to get as many people as possible to comply with their obligations voluntarily.  To do that we need to make sure that people clearly understand these obligations and the help available to them.

Businesses should examine what they are doing and perform tax health checks.  Talk to HMRC or seek professional advice where necessary.

• National Advice Service 0845 010 9000
• Self Assessment Helpline 0845 900 0444
• HMRC website

HMRC aims to enhance the way it interacts with taxpayers through:

• support: tailored to the needs and circumstances of taxpayers;
• prevention: ensuring basic processes and design make the system as secure as possible from fraud and avoidance; and identifying and tackling those who set out to obtain an unfair tax advantage