The only VAT issue mentioned in the recent Autumn statement was that the current VAT thresholds will remain until at least April 2026. By then the thresholds will not have changed for nine years.
At £85,000 of taxable turnover (not profit), the threshold was by far the highest, pre Brexit, in the EU. Many EU Member states have very low or no threshold for VAT registration. The freezing of the figure for nine years is the Government’s way for bringing more businesses into the VAT world and thus increasing VAT revenue without changing the VAT rates.
This can catch a lot of what were started as “hobby” businesses as part of a diversification plan.
There are two key considerations, the first is the VAT definition of a “taxable person”, the second the concept of “taxable turnover”.
In VAT, a taxable person is a person (individual, partnership, corporate entity or other entity) that is or is required to be registered for VAT under the 1994 VAT Act. It will include all business activities undertaken by that individual, partnership, corporate entity or other entity.
This usually creates issues at the individual level. Care has to be taken that selling private assets (e.g. a record collection or bike) is not counted as turnover, but also at what point does a hobby become a business? The second point becomes “interesting” given HMRC’s redefinition of what constitutes business activity. The old six stage test has been “simplified” to two:
Stage 1: The activity results in a supply of goods or services for consideration.
Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration)
This would seem to catch everyone who has sold something on eBay, through a local classified ad, rented a room out, etc. The changes were only announced a few months ago so there has been no update on HMRC’s position regarding a “keen” eBayer being in business, but to exceed £85,000 in turnover would suggest activity that would also pass most of the previous six business tests too.
Another issue is when an activity is undertaken by a partnership with a further, possibly linked, activity undertaken by one of the partners.
For example a farm is run by a husband and wife partnership, with one partner (usually the wife) running a B&B business from the farmhouse or a property on the cottage. Care has to be taken to ensure that there is some “clear blue water” between the two businesses. Otherwise HMRC could look to treat them as one, taxable business, putting VAT on the B&B charges.
The flip side of this is the farmer (sole prop) runs the farm and asks the friendly local VAT adviser if he can claim back the VAT on a new roof for the café/farm shop. The supplies made will be taxable so normal VAT rules say yes and so does the adviser. At the next VAT visit an irate farmer has the VAT disallowed because the café/farmshop is run as a separate business by his wife and the only supply that the farm has made is one of exempt rent (this links to the partial exemption piece in this edition).
Taxable turnover relates to supplies that are subject to VAT (including supplies at the zero-rate). Supplies that are exempt (which for most farming businesses are land and property transactions) are not taxable so do not count towards the threshold.
has taxable (including zero-rated produce) and exempt (e.g, long term cottage rental) then the business will need to undertake partial exemption calculations to see if there are any restrictions (and if so the value of that restriction) on the VAT recoverable (again see the partial exemption article in this edition).
On top of this, businesses finding themselves having to register for VAT will also need to be able to keep their records and submit their VAT returns digitally under 'Making Tax Digital' rules. Rickard Luckin can assist in determining if you need to (or will benefit from) a UK VAT registration; or need assistance with MTD issues.
This article is from the latest edition of our Agricultural Briefing. To receive future copies of any of our newsletters directly to your inbox, please visit our preference centre to register your interest.
If you have any questions about the above, or would like more information specific to your circumstances, please enter your email address below and we will get in touch: