How much VAT can be recovered on works to farmhouses?

Jonathan Corsie

Jonathan Corsie

Tax Assistant Manager

Farmhouses are essential components of farming businesses as well as being used as private residences. If a farm business is VAT registered, a proportion of VAT incurred on works to farmhouses is typically recoverable, i.e., the element that relates to the farm business. 

We have seen increased levels of farmhouse owners wishing to renovate and extend such buildings under one development. In such circumstances, the correct level of VAT to recover can be unclear. HMRC accepts that 70% of VAT incurred in relation to renovation works to farmhouses is recoverable, where the below conditions are satisfied:

  • The building is used as a typical working farmhouse; and
  • The business receiving the works undertakes full-time farming activity; and
  • The farm is operated by a sole trader or partnership; and
  • The works received are the repair and maintenance of the farmhouse.

When it comes to extension and modification works, HMRC’s usual expectations regarding VAT recovery apply, i.e., HMRC accept up to 40% of such VAT incurred may be recovered, in line with the usual business and non-business apportionment applied by the farm business.

HMRC does not prescribe a particular method for this apportionment but does have powers to challenge it where it is unfair or unreasonable. It is crucial, therefore, that careful consideration is given to what extent such development works relate to renovation and extension respectively, and what level of the VAT incurred on extension works should be recoverable.

You may wish to request that your builder issues separate invoices for the extension and renovation elements, based upon the respective cost of each. Alternatively, the costs should be split between the extension and renovation elements based upon a fair and reasonable judgement of the extent to which the value of the works relates to each element. For example, if works are carried out for renovation and extension works, totalling £60k, this could be divided as follows:

Renovations, including repairs & maintenance
(Reclaim 70% from VAT incurred on costs)
 Extensions & alternations
(Reclaim up to 40% from VAT incurred on costs)
 Invoice - £60k
Accurately divide costs
Renovation costs of £10k with VAT of £2k Extension costs of £50k with VAT of £10k
Recover 70% of VAT = £1.4k Recover up to 40% of VAT = up to £4k

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