Expenses necessary to operate a farm are generally deductible business expenses, however it’s important to know what costs are allowable and those that are not.
Allowable deductions:
- Costs associated with feeding and raising livestock
- Maintenance and fuel used on farm machinery
- Farm labourers
- Insurance to cover the business and its assets
- Small tools expected to last one year or less
Specific expenses are not allowed as deductible business expenses:
- Capital expenditure – expenditure which gives an enduring benefit – as this may qualify for capital allowances
- Specific disallowable expenses defined by tax statute and case law – common examples are legal fees incurred in the purchase of a capital item and entertaining customers
- Expenditure which has not been incurred ‘wholly and exclusively’ for the purpose of the trade
The final point here is particularly important to note as some expenditure which is classed as not being incurred ‘wholly and exclusively’ for the purpose of the trade, may be considered for a ‘dual purpose’ where there is both a business and a private element to the expense.
HMRC will allow a tax deduction for the business proportion of the expenditure.
HMRC will only allow a proportionate deduction where an expense can be split into identifiable business and private parts. If the expense is materially for a private or non-business purpose, HMRC will interpret the ‘wholly’ test very strictly and will disallow the expense in full.
The examples below highlight how the business proportion on expenses can be calculated.
Motor expenses
Where a vehicle (car or van) is used for both business and private journeys, a log of mileage can be kept to calculate the proportion that the vehicle is used for each, which should be applied to all costs including fuel, repairs and maintenance, and insurance.
Insurance
Farm insurance will cover the farm business, farm equipment, employers’ liability, commercial vehicles, private cars and the farmhouse content insurance.
The private element of the private cars is explained above. The cost of the farmhouse contents insurance cannot be claimed as a business expense.
Farmhouse expenses
HMRC recognises that the farmhouse normally fulfils a dual role being the private residence of the farmer/their family and also the centre of farm business operations.
Only the proportion of expenses such as heating and lighting, repairs and maintenance, insurance, and, in the case of the tenant farmer, rent, which is attributable to the business use of the farmhouse is allowed as a deduction in computing the farming profit for tax.
It is thought by some that a third of farmhouse expenses can be claimed as business expenses, however, there is no statutory authority for this fraction, and the extent of any business use will always be a question of fact.
For example, a farmhouse has four bedrooms, an upstairs bathroom, sitting room, dining room, study, kitchen and downstairs bathroom.
It could be said that the study, kitchen – where tradespeople meet and farm meetings are held – and downstairs bathroom, used when coming in off the farm, are used for business and hence three rooms out of 10 are said to be used for business, which is where 30% of the running costs of the farm house can be claimed as a deduction.
With regard to farmhouse repairs, only a proportion of the repair to the area used for business can be claimed.
Report costs accurately
It is important to correctly record business expenses within your accounts.
You must exclude costs that are not for the purpose of the business. If non-business costs are claimed and HMRC enquires into your reported profit and finds errors, you may incur a penalty.
