The VAT rules on rented houses on Farms and Estates can be complex. If a house is occupied rent free by an employee who is engaged in taxable activities of the business then VAT on repairs and improvements can be recovered on your VAT return in the usual way. If the house is let to the employee or to a third party, the rental income is exempt and therefore partial exemption rules should be followed.
Partial exemption can be complicated but, in simple terms, if the VAT inclusive spend on cottage repairs and improvements along with any other ‘exempt’ expenditure exceeds £45,000 in one VAT year, then all the VAT on the costs will be dis-allowed. This ruling is often misunderstood because spending £45,000 on a rental property is not a regular occurrence.
Normally Farms and Estates spend modest amounts on cottage repairs and therefore fall under de-minimis rules and receive full VAT recovery without having to apply the rules. If there are regular projects to renovate and upgrade rental properties then it can make sense to have a rolling program doing one house per partial exemption year to take advantage of the £45,000 upper limit under partial exemption. If the house has been empty for over two years or you are converting a non-residential property into a residential one, then the VAT could be charged at 5% instead of 20% giving an immediate saving.
As the rural tourism market has grown, there has been an increasing trend to develop holiday letting businesses on Farms and Estates. The supply of holiday lets is a service and a standard rated supply for VAT purposes, unlike the letting of a surplus cottage to a third party. For that reason it is not unusual to separate the holiday letting business from the VAT registered Farm or Estate business for VAT purposes, but any planning needs to take into account the initial capital expenditure incurred to create the holiday lets.
This type of VAT planning applies to Farms and Estates with perhaps two to three holiday lets. However, for those businesses looking to develop the luxury caravanning and camping sector, the likelihood is the turnover associated with that will exceed the VAT registration threshold and the VAT rules will apply. There is specific VAT legislation dealing with caravan pitch fees and any rural business involved in this sector would be well advised to ensure they are applying the rules correctly.
We recommend you seek advice from a VAT specialist when carrying out work to any property. Our VAT team at Campbell Dallas would be happy to discuss your project with you and advise on how to minimise your costs. Please contact your usual Campbell Dallas advisor or:
01738 441 888
The information in this blog should not be regarded as financial advice. This is based on our understanding in August 2019. Laws and tax rules may change in the future.