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Is it a building or equipment?

Recovery of input VAT is crucial

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The client has a piece of land for which he has just been awarded planning permission to use it for raising goats. Other uses for the land may follow. The planning permission has multiplied the value of the land by 4 or 5, leaving an unrealised capital gain of £137,000. The land is a couple of fields away from the nearest road, and there are no main services on site, nor plans to bring them in.

Before he can do this, he has to improve the land by putting up sheds, fences etc, and a home for himself. He has to live on site, because livestock might need attention at any time. To comply with the planning permission, the "home" has to be capable of being dismantled and taken away after 4 years. Such buildings exist, and the client has identified a suitable one. The client is single and lives alone, and has simple needs - he says he can manage without mains services.

Of course, this all raises various issues, but the main one right now is that he says the project will not be affordable if he can't reclaim the input VAT on the improvements. One possibility I've been wondering about is whether the improvements can be reasonably classed as Plant & Equipment.

I would appreciate any thoughts.

 

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RLI
By lionofludesch
14th Mar 2020 16:25

Your question ought to be "is it business or private expenditure ?"

Sheds look fine - as long as he's not filling them with his personal stuff.

The house seems more debatable. What sort of a case are you making for it being a farm building ?

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Replying to lionofludesch:
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By b.clarke
15th Mar 2020 17:32

lionofludesch wrote:

The house seems more debatable. What sort of a case are you making for it being a farm building ?

It's early days in my thinking, so it's very fluid at this point. The fact that the buiding would be removable might be a help. I've had a look for any court cases which seem relevant. Nothing so far, but I will keep looking.

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By Accountant A
15th Jun 2020 20:48

-o

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Replying to Accountant A:
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By whitevanman
15th Mar 2020 08:14

When I read the question I took it to be a scheme to get PP on a piece of land for eventual, residential, development. That being so, any "trade" may not be commercial and as you have observed, the sums don't seem to add up (without the planning angle).

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Replying to whitevanman:
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By b.clarke
16th Mar 2020 08:55

whitevanman wrote:

When I read the question I took it to be a scheme to get PP on a piece of land for eventual, residential, development. That being so, any "trade" may not be commercial and as you have observed, the sums don't seem to add up (without the planning angle).

It will never be a residential development. For one thing, it's Green Belt land. For another, the client wants to live out his days as what I will loosely call a "farmer". The first plan is goats, and he would love eventually to keep and sell parrots and similar exotic feathered friends. The trade would definitely be commercial - for one thing, he needs the source of income.

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Replying to Accountant A:
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By b.clarke
15th Mar 2020 17:45

Accountant A wrote:

You say 'The planning permission has multiplied the value of the land by 4 or 5, leaving an unrealised capital gain of £137,000.' So why is that relevant unless he intends to sell?

He doesn't want to sell, but the land is in his name, and we wants the whole thing (land and business) in a company. So there is an obvious CGT problem. As there is no business yet, only an asset, I don't think incorporation relief (s162 CGTA) applies. As a rule, I'm a fan of keeping the land in the client's name and putting the trade in a company; he doesn't like that idea, but his reason seems a bit vague. I will have to have a discussion with him on that.

You then say 'Before he can do this [do what?]

[/quote]

Raise goats and sell them.

So to realise a gain of £137,000, he has to spend some/a lot of money. Is the £137,000 net of that money?

[/quote]

The £137,000 is only the unrealised gain. He is arranging bank loans, on the basis of a cash flow forecast which I haven't seen yet.

Finally, you say 'the project will not be affordable if he can't reclaim the input VAT on the improvements'. Do you mean from a cashflow perspective? If his profit hangs on VAT recovery, it's unlikely to be a commercial venture. Does that assume VAT recovery and then no VAT paid on subsequent supplies?

[/quote]

I won't be sure about this until I see the cash flow forecast, but I suspect the problem is he's planning for too small a loan.

I think you need to sit down with the client and get to the bottom of some of the number. If he can make a profit of £137,000 and walk away now, I'm not sure what his other plans that apparently rely entirely on VAT recovery are about.

[/quote]

He doesn't want to walk away because this is his livelihood going forward.

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By WhichTyler
15th Mar 2020 16:57

b.clarke wrote:

He has to live on site, because livestock might need attention at any time.

 


I wonder if this is actually true, or is it because it suits him?
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Replying to WhichTyler:
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By Accountant A
15th Jun 2020 20:36

0u

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By lesley.barnes
16th Mar 2020 15:29

Has the client really thought this through? Has he ever kept goats on a non commercial basis? Planning permission but the home has to be capable of being dismantled in 4 years. If the council insist on this were will he live? The land has no mains services and is a couple of field away from the nearest road. How will he look after livestock without water or does he have a spring? I don't think this could ever produce a living - he would be limited by actually getting food/supplies from the road across the fields and goats to market the other way. Does he have a market for his goats - I'm assuming that they are being used for meat. He couldn't use them for milk because of the lack of mains services - hygiene and refrigeration etc. I bet his cash flow projections are interesting.

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By whitevanman
16th Mar 2020 17:29

I have seen something similar (more than once).
Farmer (or family member) wants to build house on part of farmland. Green belt so usually no chance.
So, decides on "new venture" where on-site "child minding" needed. Council agrees some development (sheds etc) and possibly a house for the "childminder".
Foot is now in the planning door.
Fast forward two or three (4 ?) years and the wooden hut is replaced by a proper building. Hey presto, planning hurdle overcome. Of course future sale must be with "husbandry" clause but the value is a lot more than it would have been as farmland. Nothing to do with genuine trading but of course that is difficult to prove and no-one will expect profits in the early years.
I don't think I am being cynical but who knows, this may be the one.

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RLI
By lionofludesch
16th Mar 2020 17:33

Why mention the £137,000 gain ?

If he's not selling, it's of no relevance.

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