Partial exemption - test your knowledge! I hope you’ve been paying attention thus-far! See if you can decide whether the farm below is de minimis on an annual basis.
As previously suggested, the taxable input tax is recoverable, the exempt input tax is not at this stage because we do not know the outcome of the de minimus test. Input VAT in the residual pot must be apportioned between taxable and exempt supplies.
Secondly, the total exempt input VAT must not be more than the total input VAT – i.e. there must be more input VAT attributed to taxable supplies than exempt. If both conditions are met, all input VAT is recoverable. A farming operation should watch out for significant repairs, improvements etc. to rental properties which may lead to more exempt input VAT than usual.
1. The farm has zero-rated crop sales of £1m and residential letting income of £200k
The standard method of input VAT apportionment
2. It incurs the following input VAT:
To apportion residual input VAT, a business may use the ‘standard method’ without HMRC agreement. This is usually sufficient for a farming business, but if it does not produce a fair and reasonable attribution of input VAT, the farm may apply to HMRC to use a Partial Exemption Special Method (a ‘PESM’) of their choosing. A PESM must be approved by HMRC before it is used. Under the special method a percentage of input VAT is attributed to taxable and exempt supplies. The percentage is calculated by taking the total taxable supplies made in the period and dividing this by the total taxable and exempt supplies. That percentage is then rounded up to the nearest whole number to leave the percentage of residual input VAT to be allocated to taxable supplies. For example, if £600,000 of taxable supplies are made and £100,000 of exempt, the recoverable percentage is 86% – i.e. 600,000 / (600,000 + 100,000) = 85.71% rounded up to 86%. The exempt proportion of the residual pot is added to the directly attributable to exempt. The sum of these two figures is the total exempt input VAT attributable to exempt supplies. If the total input VAT the business attributes to exempt supplies exceeds the de minimis limits, recovery will need to be restricted. What is the de minimis test? The de minimis rule is a threshold set by HMRC that allows small businesses to recover input tax linked to exempt supplies subject to certain limits. This can increase the amount of recoverable input tax for partially exempt businesses. There are two stages of the test. Firstly, total exempt input VAT must be within monetary limits explained below:
•
Producing crops, £2,000
Each year, a partially exempt business must perform an annual adjustment to look at its partial exemption position for the whole VAT year. If de minimis is not met on an annual basis, the irrecoverable portion of input VAT will need paying to HMRC. Similarly, if the farm has been restricting input VAT recovery in-year, it may be due a refund from HMRC. • •
Residential letting, £6,000
Residual, £5,000
Examples of typical taxable supplies in the agricultural sector:
•
The sale of crops, livestock, and other foodstuffs suitable for human consumption
Additional points – don’t skip these, there is some useful info here! A newly registered business can complete its VAT returns until the first annual adjustment on a ‘use-based’ method without agreement from HMRC. This is useful if taxable supplies won’t be made from the outset, but it is thought de minimis will be met at year end. • • • 1. If a business is de minimis in one VAT year, it can consider itself de minimis on each return during the next VAT year until it gets to the annual adjustment calculation. •
Letting of land and buildings which has been opted for tax
Land let for grazing
Facilities provided for the purpose of storing goods (this is often incorrectly treated as exempt)
Rights to fell timber or take fish
•
Contracting
2. While the annual adjustment is calculated to the end of the VAT year, any adjustment required can be deferred until the VAT return after the year end finishes – so, the April return for monthly filers. 3. Remember to consider opting to tax commercial buildings in order to recover input VAT on their construction/ refurbishment and avoid potential partial exemption issues. 4. Providing a person the right to store goods in a building is likely to be taxable at the 20% rate of VAT.
•
Animal feed
Examples of typical exempt supplies in the agricultural sector:
•
Residential property letting
• Other letting of land and buildings which has not been opted for tax
ANSWER TO TEST
The farm is not de minimis.
Standard method % = 84% (1m/1.2m, rounded up)
So, residual pot input VAT = £4,200 taxable and £800 exempt
Total Exempt Input VAT
No more than
Monthly
£625
Quarterly
£1,875
Total taxable = £6,200
Annually
£7,500
Total exempt = £6,800 Exempt is less than £7,500 but more than 50% of total input VAT
AGRICULTURE AND FARMING | SCRUTTON BLAND | 9
Made with FlippingBook Learn more on our blog