We are often asked by our farming clients whether they can recover the input VAT incurred on their rented farm cottages or other residential properties.
The answer is not a straight forward yes or no, but will depend on several factors.
Rental income from a residential property is exempt from VAT therefore a VAT registered farmer (we shall call him Bill) with (say) a rented farm cottage in addition to his farming income has both exempt and taxable supplies – both of which need to be reported on the same VAT Return. Bill’s income is partly exempt for VAT purposes and he is faced with an input VAT restriction on any costs incurred relating to the exempt supplies i.e. the rent.
There are however some partial exemption de minimis rules that may allow Bill to recover the VAT incurred on his farm cottage expenditure. Partial exemption rules are fairly comprehensive but in simple terms, VAT on exempt purchases may be reclaimed where the amount is no more than £625 per month on average and less than 50% of the total business input VAT recovered.
It is important to note that both the VAT registered business and the rental property must be in the same ownership. If Bill is a sole trader but owns the farm cottage jointly with his wife for example, then the rental income and expenditure will not fall within the same VAT registration as the farm and should not be included.
The rules are also different for furnished holiday lets (FHL). If the cottage qualifies as a FHL then VAT will be chargeable on the rent but should be recoverable on FHL expenses.
If you think you may be affected by the above or would like any further information relating to the VAT partial exemption rules, please do not hesitate to contact a member of our agricultural team.