Business Clinic: Are farm and land sale fees a business cost?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Joe Spencer, a partner at accountant MHA, advises on how farm or land sale expenses should be treated for tax.

See also: Business Clinic: can I sell for a song to avoid inheritance tax?

Q. Could you please advise me if estate agent and solicitor fees would be regarded as a business expense, in respect of income tax and VAT, if the whole farm or a part of it is sold.

A. As ever, the simple answer is “it depends”!

Most professional costs can be relieved somewhere, but the key point is that they will need to follow the nature of the transaction to which they relate.

So, for example, the sale of livestock or deadstock will be an income tax matter and the auctioneer’s fees are deducted from the sale proceeds in calculating the income tax liability.

Similarly, the costs involved in the sale of machinery will reduce the amount charged against the tax pool for machinery, and thus ultimately comes into the income tax computation.

Land and buildings

Where the costs relate to land and buildings, they will normally be a capital gains tax (CGT) matter and will be deducted from the sale proceeds in arriving at the CGT liability.

Care needs to be taken here in distinguishing whether the assets being sold are wholly or partly private, so where professional fees relate to both a residential farmhouse and associated farmland, the fees need to be split between the two property types and then, in the case of the farmhouse, further apportionment is required between the business and residential use of the house.

Normally one would apportion based on gross sales value, but where an aspect of the sale involves a greater degree of complexity it may be worth asking the professionals to split the fee according to the time spent.

The deductibility of professional costs does not apply simply to the costs incurred on sale.

Where property is acquired, any associated costs should not be written off to profit and loss at the point of acquisition but should be added to the purchase price and carried forward until such time as the property is sold or passed on, at which point CGT relief can be claimed.

The apportionment between business and private elements will also apply to other costs such as legal and surveyors’ fees, together with stamp duty land tax.

The key exception here is that the costs of setting up finance such as bank arrangement fees will normally be treated as an income tax matter.

HMRC guidance states: “A deduction in computing the taxable profits of a trade is allowable for certain incidental costs of obtaining finance by means of a loan or the issue of loan stock where the interest on that loan or stock is itself an allowable deduction.”

VAT

The position in relation to the recovery of VAT input tax is similar but slightly more complicated. Although the services themselves will be standard rated, it is important to look at the VAT treatment of the underlying supply to which they relate.

Since the sale of farm produce or machinery is normally zero or standard rated, the input VAT associated with any costs will normally be fully recoverable.

The sale of land (unless it is subject to an option to tax) is however normally exempt and the associated VAT input tax on the professional fees will therefore require a partial exemption calculation.

Unless the total exempt input tax is less than £7,500/year and less than 50% of the total input tax, the claim will be restricted.

Residential property is outside the scope of tax, so no recovery should be made here.

This is an area of high risk and where the amounts of VAT input tax involved are material, professional help should be sought before a sale takes place.

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