With the staycation looking like it is here to stay, and the rapidly decreasing support payments, diversifying into agritourism may be a temping option for many farmers.
Certainly, this could be the case as many farmers already support the income they derive from their agricultural activities by hosting holidaymakers on camping and caravan sites, in holiday cottages, or in specially converted farm buildings.
But the decision is not without its considerations, and mainly these are around tax. In this article, we look at the main issues surrounding holiday lets.
Holiday lets are subject to business rates if they are available to be let for short periods for at least 140 days per year. In recent years, single holiday lets have been able to claim Small Business Rates Relief, meaning often there are no business rates to pay.
If, however, your holiday let doesn’t meet this criterion, and is mainly used as a second home for you and your family, business rates will not apply, and you will be charged council tax.
Recently, HMRC have announced they will be cracking down in this area, meaning if you are claiming your holiday let is available when it is not to avoid the council tax, expect a knock at the farm door.
Prior to 2008, many people bought holiday lets as a way of sheltering part of their estate from the tax man. This was because after two years of ownership, holiday lets were subject to Business Property Relief, and therefore Inheritance Tax Relief.
However, in 2008 HMRC published a change in their view of the availability of BPR and were successful in enforcing via the tax courts.
As a result, holiday cottages no longer benefit from relief on Inheritance Tax in the same way as agriculture land and buildings.
This is because they are classed by HMRC as an investment activity rather than a trading business.
There has been one occasion where a tribunal went against HMRC in this view, when the owner of the holiday lets argued they should be eligible for BPR. However, the case hinged on the extra services the owner provides, which were significant enough for the tribunal to agree that on this occasion, the holiday lets constituted a trading business.
In this case, the owner provided services far more than what is normal for a holiday let owner.
Holiday letting is considered a service by HMRC, rather than the renting of a building. As such, prices are subject to VAT if the letting is carried out by a VAT-registered business.
One way of mitigating this is to place the holiday let in a separate legal entity to the farm business, thereby removing it from the VAT burden altogether.
However, the businesses must be kept entirely separate for this to work, otherwise HMRC can decide to aggregate them, which could leave you paying a large VAT bill for the VAT you didn’t charge out on the holiday let property.
It is important to remember that profits from holiday lets are treated differently to those from your farming business because they are treated as property income. This means you cannot offset any losses from your holiday cottages against your farm profits, but they can be offset against future profits on the same property.
However, profits from holiday lets can be considered when deciding on the level of pension contributions that you are able to make.
Although there are certainly benefits of entering the agritourism market, understanding the tax implications of holiday lets is key to making this type of diversification pay.
We would recommend anyone considering it to take professional advice and ensure everything is structured in the most tax efficient way.
If you would like to discuss this, or any other form of diversification, get in touch on 01295 270200 or fill in the contact form here.
Other Agricultural Spotlight Summer 2022 articles