Farmhouse renovations fail revenue and trading testsby
A farming partnership used the VAT rate charged to determine whether renovation costs were capital or revenue, but also charged the expenses through the wrong partnership.
Farming partnership, Elliot Balnakeil, claimed deductible expenses totalling £273,001 in its 2011/12 tax return. HMRC disallowed the expenses. While £6,980 was subsequently agreed, the following expenses remained in dispute:
- £206,407 on repairs to Balnakeil House, the biggest farm property;
- £23,213 on repairs to the Bothy, a small outbuilding then used for storage;
- £36,401 on related legal and professional fees
The FTT [TC08143] had to determine whether the expenses were capital or revenue in nature, and whether such expenditure was incurred wholly and exclusively for the purposes of the partnership trade.
At the time, the partnership had a hill farm of about 13,000 acres located in the Scottish Highlands. It held several farm buildings and houses to provide tied accommodation for staff working on the farm, given there was no alternative housing available near the farm owing to its remote location.
Balnakeil House was a category A listed building, and described by one of the partners as an “albatross” as although it was not fully used and in poor condition, it couldn’t be sold or demolished due to its listed status.
In October 2002 an urgent works notice was issued, with initial estimates to carry out the statutory repairs falling between £250,000 and £300,000. However, such works would not have qualified for grant aid, and would have left the house “barely fit for modern use”.
As such, the partnership determined that the works should go beyond the statutory notice, and that Balnakeil House and Bothy should be used for a fixed period of five years as a furnished holiday let, in order to be eligible for funding for improvements. In 2009, two external funding sources were secured from the Scotland Rural Development Programme and Historic Scotland.
The renovations commenced in early 2010 and were mostly complete by late 2012. However, in October 2014, the Elliot Balnakeil partnership dissolved.
In January 2012, a new partnership was formed: Andrew & Elizabeth Elliot (Balnakeil). It was this new partnership that marketed the House and Bothy as furnished holiday lets and received the first letting income. The old Elliot Balnakeil farming partnership featured no let property expenses in its accounts to 28 May 2011.
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