Health check minimises agri business’ VAT exposure

The challenge

After a detailed review of the historical VAT periods, we confirmed the error related to the VAT treatment of a residential property within the client’s portfolio.

In summary, significant renovations, including the addition of a first floor, took place on the property, which was then sold.

The client had reclaimed VAT on the associated construction costs in full, on the basis that the sale constituted a supply of a newly constructed dwelling, and therefore qualified as a zero-rated taxable supply for VAT purposes.

However, as the property had not been demolished to ground level prior to the works, it did not meet the criteria for zero-rating.

Instead, the sale was treated as an exempt supply of an existing dwelling, meaning the VAT incurred on the building costs was not recoverable.

It highlighted how what can seem to be a small difference can have a significant impact on the VAT treatment.

And this small but vital distinction between the complete demolition and rebuilding of a property versus a comprehensive refurbishment and extension meant more that £70k of VAT was reclaimed in error.

A further complexity came from the client’s position as a partially exempt trader.

Their business activities generated a mixture of taxable supplies — both farming operations and commercial lettings, all of which were subject to VAT — and exempt supplies from their residential lettings.

Historically, the client had recovered input VAT in full as they had remained within the de minimis thresholds under the partial exemption rules.

However, once the error in the VAT treatment of the property sale was taken into account, the partial exemption calculations for the relevant periods required revisiting. The corrected figures resulted in the de minimis limits being exceeded, fundamentally altering the client’s recovery position for those periods.

Our approach

Having worked through the initial issue, we recommended a VAT Health Check to check that the correct VAT treatment had been applied to both their income and expenditure, and to confirm that the figures being submitted to HMRC were accurate and supportable to minimise future challenges.

We completed a thorough review and reclassification of the VAT on all expenses incurred across the relevant periods, categorising each item appropriately.

This then provided the foundation from which we recalculated the partial exemption positions for each affected period.

Throughout the process, we supported the client comprehensively, preparing and submitting amendments directly to HMRC on their behalf and providing all supporting information required to facilitate HMRC’s review.

We also produced a detailed written report, setting out our findings together with clear action points and practical guidance for the client to apply when preparing VAT returns going forward.

The outcome

Completing the VAT review gave the client confidence that their VAT processes were sound.

But importantly, based on the disclosure having been made on an unprompted basis, penalties were mitigated to the greatest extent permitted under HMRC’s guidelines.

This was an outcome made possible by the client’s proactive approach in seeking professional advice.

We’re here to help

If you’re working within the agricultural and farming sector within complex VAT frameworks, this case highlights just how important proactive VAT reviews can be.

To find out how a VAT Health Check could support your business, please get in touch with your usual Scrutton Bland adviser, email hello@scruttonbland.co.uk or call 0330 058 6559