Farmland is normally be considered to be commercial land, i.e. not “bare” land, as it is normally covered with infrastructure or civil engineering works required to make it operational as a farm e.g. irrigation systems, roads, utility connections, etc.
Farmland which has been developed and is expected to be used for commercial purposes i.e. the operation of a farming business. As such, the supply of any such commercial farmland would be subject to VAT at the standard rate.
Non-commercial farm land:
A land which is not used for commercial farming activities, but which is used for private farming purposes such as the growing of crops or grazing for livestock, may also qualify as ‘commercial’ farmland if it is covered by completed or partially completed buildings or civil engineering works.
Where such farmland is not ‘covered land’ and has merely been ‘developed’ or ‘worked’ for the purposes of growing crops, with no civil engineering works built into the land in order to facilitate that activity, then it is likely the land should be considered to be bare land. In such cases, the supply of the farmland by way of either sale or lease should be exempt from VAT.
Other farm buildings:
Where buildings are situated on agricultural land which does not meet the conditions, they shall be treated as commercial buildings. For example, a farmhouse may be used as a non-principal place of residence of a person (e.g. only used on weekends), or a building may be used for a commercial farm-related purpose (e.g. barns, livestock sheds, granaries, stables, etc). As a result of being considered to be commercial buildings, the lease or sale of such farm buildings should be subject to VAT at the standard rate.
Key points to note:
- Farmhouses which meet the conditions to be treated as a residential building should be exempt from VAT (or zero-rated in the case of the first supply after construction). A building will typically be a residential building where it is occupied by a person as their principal place of residence;
- Other farm buildings not intended to be used as a principal place of residence will be subject to the standard rate of VAT. This would include farmhouses which are not used by a person as their principal place of residence, e.g. houses used as weekend homes only;
- Farmland which is considered ‘covered’ with buildings or civil engineering works should be subject to VAT at the standard rate;
- Farmland which is considered ‘bare land’, i.e. the plot has no buildings or civil engineering work (not even in-built irrigation, etc), should be exempt from VAT; and
- The supply of a farm as a whole should be considered in light of the rules regarding composite or mixed supplies and any consideration apportioned appropriately where applicable.
A farmhouse shall not be considered to be a residential building where it is:
- Any place that is not a building fixed to the ground and which can be moved without being damaged;
- Any building that is used as a hotel, motel, bed and breakfast establishment, or hospital or the like;
- A serviced apartment for which services in addition to the supply of accommodation are provided;
- Any building constructed or converted without lawful authority.
- Where a farmhouse is used as a weekend home of a family, it is not to be the principal place of residence and therefore is not a residential building.
- Where a part of a farmhouse is used solely as a principal place of residence of a person, and another part of the farmhouse is used as a motel, the part of the house which is used as a principal place of residence may qualify as a residential building, provided the other conditions are met.
Where a farmhouse meets the definition of a residential building, the first supply of such a farmhouse within 3 years of its completion shall be zero-rated for VAT purposes. Any subsequent supply (including both sale or lease) shall be exempt from VAT.
Multiple or composite supply
The VAT treatment of a supply of a farm as a whole, comprising both commercial land, commercial buildings and residential buildings, should be considered on the basis of whether it is a single composite supply (and therefore subject to the VAT liability of the principal component), or whether it is a mixed supply (and therefore the individual components are subject to different VAT treatments). In order to determine the correct VAT liability, each case will need to be considered on a case by case basis because the fact patterns will differ.
Specifically, the supplier is expected to identify the following:
- Whether the supply is a single composite supply or multiple supplies; and
- The VAT treatment of each supply being made.
Where a supplier is making a single composite supply of a farm where different elements of the farm are used for different taxable and non-taxable purposes, the supplier may need to identify the predominant usage of the farm and apply that VAT treatment to the whole supply. Again, this determination needs to be made on a case by case basis. For example:
- If the main use of a farm is as a principal place of residence of a family, with the farmland being used for the personal enjoyment of the family, the supply of a residential building would likely be the predominant purpose and therefore the whole supply would be exempt from VAT.
- If a commercial farm has a residential building which permanently accommodates the manager of the farm and his or her family, the use of the farm for commercial purposes would likely be a main component of the supply, and therefore the sale would in principle be subject to VAT.
Where a farm is supplied which is not considered to be a single composite supply, the VAT liability should be apportioned. An indicator that the supply is not a single composite supply could be the separate identification of prices for different parts of the farm, specified in the sale contract. This would mean that the value of the consideration received for the residential part of the farm (i.e. a farmhouse) should be treated as exempt from VAT and the value of consideration relating to the commercial part of the farm (i.e. covered land, commercial buildings) should be treated as standard rated.
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