Is it tax-deductible?

As anyone who had tax to pay at the end of January knows, it’s just three weeks from then to a letter from HM Revenue and Customs threatening bailiffs if tax isn’t paid immediately. HMRC is under pressure to raise more in taxes, while the Government maintains the fig leaf that it’s cutting spending and waste, without raising taxes. This has made HMRC more aggressive. It now has no qualms about tipping a company into administration over unpaid PAYE or other taxes.

This is why appropriateness tests are being applied to challenge agricultural property relief on dwelling houses, where the land may have been let out or disposed of. There have been victories for the taxpayer, but the culture of HMRC is to pursue inheritance tax cases, if there are questions over the property or assets that have been disposed of within the family.

An example of the tough approach is over repairs against capital expenditure. This makes a big difference to the tax position, as depreciation allowed for buildings is restrictive, so it will take a long time to write off expenditure. The old advice to make do and mend can be good, but there have been examples of this being challenged by HMRC.

One example, that became a precedent for other cases, was where a farm lane was resurfaced and treated as a repair, making it tax deductible in a single year. HMRC argued that as the quality and usefulness of the lane was radically improved this was capital expenditure. But the decision in favour of the taxpayer (Pratt and Sons v HMRC) hinged on the fact that this was an existing, rather than a new lane. The tax tribunal said it would probably have ruled in favour of the HMRC had the lane been widened for bigger vehicles or been a new one entirely.

This principle extends to buildings, where it’s open to question whether what’s taking place are extensive repairs or improvements to the degree that the cost has to be treated as capital expenditure. Based on the lane ruling this would be the case if, for example, cattle accommodation was increased or new facilities, such as a milking parlour, were included. Take advice before seeking planning approval or seeking quotes from builders, since how you describe the work could influence the tax outcome.

A tough approach is also being applied by the VAT authorities over farm diversifications where VAT has to be charged, and their distinction from zero-rated farming activities. Where services are provided from the farm to the business that has to charge VAT, which is what diversification is all about, the VAT treatment of that service has been challenged.

Ironically when it comes to repairs, if a dwelling house is involved, it can pay to knock down rather than repair. With a new-build dwelling house VAT can be reclaimed on materials and labour, but this isn’t the case with repairs. There is provision for VAT to be claimed if it can be proved the building hasn’t been inhabited for a time, normally two years plus.

The amounts involved can be significant, in the repair and renewal examples – and in each case it’s worth taking advice about how best to minimise the tax liability or maximise the scope to reclaim VAT.

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