The Perfect Storm: implications of diversification for agriculture

In recent years, farming businesses have been facing an increasing number of VAT issues, as a result of the increase in diversification as highlighted in a recent article by UK 200 member Alison Sampson. With more and more people seeking to reduce their meat consumption, we could see farmers looking to embrace new activities to generate income from alternative sources, so the increase in diversification is likely to continue.

Historically, farming businesses have only produced zero-rated supplies such as crops and livestock - so although they are entitled to full VAT recovery on costs, they usually have no VAT to declare.

However, it is likely that very few farms are still making exclusively zero-rated supplies. Many have diversified into activities such as hospitality, agri-tourism, or renewable energy. Defra reported that two thirds of farm businesses in England in 2017-18 included some for of diversified activities which accounted for 28% of their profit according to a recent article published by Accountancy Daily.

Here’s the catch: diversified activities may include activities which are subject to VAT (standard rate or reduced rate), or activities which are VAT exempt. Before embarking on new ventures, farms should give due consideration to the VAT implications.

The Country Land and Business Association (CLA) is calling for the creation of a single business entity for all farm activities (called a Rural Business Unit). This is in response to the extension of Making Tax Digital (MTD) to income tax reporting and its impact on unincorporated rural businesses, particularly those which have diversified into other income streams.

According to the report, the CLA stated: "It has become apparent that whilst there is a requirement to provide information on income and expenditure to HMRC four times a year, with a formal return submitted digitally after the year end, this will have to be done for each business activity.

"This could mean that a diversified business with farming income and income from a campsite, a 4x4 experience and from exporting electricity to the grid from an anaerobic digester will have to submit 17 returns a year.”

Some farms go years without a VAT inspection, without considering the consequences of diversification. If VAT errors are repeated over the course of several years, HMRC can impose assessments and penalties. Businesses miscoding income as zero-rated instead of exempt is another potential problem.

The implications of diversification are often unforeseen and farming businesses can inadvertently find themselves in difficulty. Forrester Boyd can help to put your mind at rest by conducting a review of your business activities and VAT return declarations to identify any miscoded income and ensure that your returns are watertight by the time you click submit.

If you are considering diversification or have diversified and concerned about whether you are preparing your returns correctly, contact us to talk to one of our agriculture specialists.

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