Are building renovations always allowable against income?

03 September 2021

It is part of the historical legacy of farming that there will normally be a number of buildings on a holding dating back to times when machinery was smaller, yields were lower and employees more numerous. Some of these will have been sold off, but the problem of what to do with such structures can be a tricky one, particularly if they are listed as being of historic importance.

This was the issue which confronted the Elliot Balnakeil partnership in 2010-2012. The partnership had been in existence for over a century and in addition to 13,000 acres of upland hill farm, owned a grade 1 listed manor house and a bothy, both of which needed substantial works to make them habitable. The properties were renovated at a cost of some £929,000 and after deducting grant aid and an element for improvement, the costs were claimed as farm revenue expenditure. HMRC disagreed and the case eventually came before the First Tier Tribunal in May 2021.

The situation was not straight forward, since the partnership was subsequently dissolved, and the expenditure was incurred in part because the local authority had made it compulsory and so that the properties could be used for furnished holiday lettings. The FTT therefore had to decide:

  • Was the expenditure capital or revenue? and
  • Was it wholly and exclusively for business purposes?

There is a wealth of case law on both these points, but in summing up on the first issue the Tribunal concluded that the works were capital in nature, the VAT treatment of the works was irrelevant and the scale of the work was such that it represented the replacement of an “entirety”. In the words of the FTT chairman

the House was transformed from being a farmhouse of minimal facilities and not fit for modern living, … to being a luxury holiday home … as a fact therefore … both the House and the Bothy have changed their overall character.

Since the expenditure was capital, there was in fact no need to consider the second point, but for completeness the Tribunal considered it and concluded

The trade in question was …in livestock farming, …the disputed expenditure was for a new trade in furnished holiday letting. Consequently, there was no alignment between the trade in question and the purpose of the expenditure under appeal for the test of ‘wholly and exclusively.

According to MHA agricultural partner Joe Spencer 

The case is an important one. Although the facts are quite specific it underlines some key general principles and the need to plan very carefully where traditional buildings are being converted for a diversification project.

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