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Your Friend The Taxman

One of the smallholding magazines recently published an article about VAT and tax as they apply to smallholders and it seems worth repeating that you can use the system to your advantage.

First, VAT. When your sales exceed a certain limit you have to register with Customs and submit a VAT return but few people know that you can voluntarily register below the limit if it suits you. As far as I can see there is no lower limit at all. The advantage for the smallholder is that, once registered, you can recover the VAT on your business purchases. You have to show VAT on your sales invoices or receipts but as your produce will be food the tax rate is zero % so your selling prices are no higher.

In our case we sell beasts and perhaps some fodder, which are zero rated so we owe the VAT man nothing for that. Then we buy in feed, which is also zero rated, and a mass of other goods and services which are taxed at 17.5%. Every quarter we send in our VAT return and get a cheque back for the amount of VAT we had to suffer on our purchases.

The price you pay for this massive advantage is small. First you have to keep simple but complete records of purchases and sales. These must clearly exclude the feed for pets and any purchases for domestic use. Second, you have to do the quarterly return on time or face financial penalties.

Next, let’s look at income tax. If you are running a business if only a small one then you need to register with the Inland Revenue and send in a tax return for the business so that they can levy any tax due. But your business probably fails to make a profit. Well then perhaps it is a hobby, always making a loss, in which case the Revenue are not interested. If not a hobby, you can set any loss against other income and receive a refund of tax paid on that other income. But be careful about the special rules which allow the Revenue to refuse this offset of farming losses against other income if they think you are a “hobby farmer”. You need to be able to convince them that you are serious about making a profit and the best way is to show a profit from time to time and pay the tax on it.

It really is not very difficult and the officials one deals with are very helpful. The main rule is not to tell any lies. Tax evasion is a serious offence but tax avoidance is just playing by the rules. As the learned judge said many years ago “no man is obliged to arrange his affairs so as to allow the taxman to put the biggest possible shovel into his stores”.

Julian Phillipson