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Farm B&B owner wins VAT case

13th Dec 2011
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A farmer’s wife running a B&B won her case at a VAT tribunal to overturn HMRC's ruling that it was part of an "aggregated" business registered for VAT.

The recent decision in AD and J Forster v HMRC [2011] UKFTT 469 (TC01319) concerned Danielle Forster, a sleeping partner in a VAT-registered farming business with with her husband and son, who also ran her own small B&B business from the family’s farmhouse. Although the B&B traded below the current VAT-registration threshold, an HMRC officer inspector attempted to charge VAT on the sideline business. 
The officer demanded Forster's B&B should be ‘aggregated’ with the farm, even though she claimed having to pay the extra tax would ultimately close her business. 
At the hearing, Glyn Edwards, the CCH Fee Protection VAT litigation specialist who represented Forster, pushed the HMRC inspector to detail the 14 factors determining whether the B&B was part of the farm business or separate, and what bearing they had on his decision. According to Edwards, a majority were either neutral or weighed in favour of the B&B, including: 
  • Mrs Forster has own records, bank  account, and annual accounts, and considers the B&B to be her own separate business which she has operated since the 1970s
  • Mrs Forster takes bookings, cooks the breakfasts, and cleans the rooms herself with the help of a part-time cleaner that is paid for by the B&B
  • Mrs Forster is responsible for any profits or losses of the B&B and declares the income on her own tax return
  • There are no cross-charges from the farm to the B&B for rent or a share of the utility bills
Edwards argued that HMRC had exaggerated the importance of alleged financial links between the partnership in the farming business and Mrs Forster’s business while ignoring the facts which clearly demonstrated that the two were separate.
Nicholas Aleksander, the tribunal judge, agreed and found in favour of Forster. In his view HMRC could not have been “reasonably satisfied that there was an artificial separation of the farming and B&B business.”
He stated HMRC did not take into account that the B&B was started by Mrs Forster in 1975, independently of the farming business, or that she run the business and its accounts herself separately from the farm with her own bank account and books. 
Edwards said: “This judgement will make it much easier to resist HMRC’s attempts to target small stand-alone businesses run by, in this case, a farming family member. Since this decision we have already seen HMRC retreat in another similar case in the farming sector which had been the subject of a long dispute.”
“HMRC should never had taken the case this far and defend what proved to be indefensible,” added Edwards. “It also shows that HMRC can push small businesses to tribunals even when it is unlikely to win.”
A HMRC spokesperson told AccountingWEB in response: “This is not a ground breaking ruling but is one isolated Tribunal decision relating to a specific set of circumstances.
“HMRC applies the rules fairly and consistently in all cases where we believe that a single business has been artificially separated to ensure that the right amount of VAT is paid on all taxable supplies.  
“HMRC makes decisions based on the facts related to each specific case and where a customer disagrees with that decision they can take it to a Tribunal for independent review. Because of our statutory duty of confidentiality, we cannot discuss individual taxpayer affairs.”

Replies (2)

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By k.gordon
19th Dec 2011 14:37

Fairness and consistency is all very well ...

What would really be of help is if they could also apply the rules correctly.

The case revealed serious flaws in HMRC's approach and it would be of immense benefit to all if HMRC could consider what went wrong internally and to ensure that other taxpayers are not put through the trauma that Mrs Forster and her family had to endure.

For my own comments on this case, please see:

Keith Gordon

Atlas Chambers.

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By dominovision
03rd Jan 2012 12:26

I think that HMRC should compensate the B&B owners for the time they spent on this and fire the person who brough the case.

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