Since the 1960's farmers living on the farm have been able to claim a flat 25% deduction for farmhouse expenses such as power, insurance and minor repairs and maintenance. They were also able to claim a 100% deduction on telephone rental, rates and the interest on the farm mortgage.
Inland Revenue recently advised it considers this flat rate no longer appropriate and will be replaced by a new approach, with these changes to farmhouse deductions applying from the 2017/2018 year onwards. The new approach largely relates to sole traders and partnerships, as separate rules apply to houses provided to farm employees, shareholder-employees and beneficiaries.
The deductibility, or percentage of deductibility, of farmhouse expenses will depend on a number of factors, including who owns the farmhouse, who operates the farming business, and who lives in the farmhouse. We suggest you review your current claims on farmhouse expenses in light of the following principles applied by Inland Revenue:
Where it is possible to dissect expenses into deductible and non-deductible amounts, that method should be used first, eg business and private toll calls
Where it is difficult to separate the deductible and non-deductible amounts the expense needs to be apportioned on a fair and reasonable basis. An adjustment based on time and space will generally be an appropriate basis for expenses such as power, repairs and maintenance, and dwelling insurance
Where expenses are incurred on the farm as a whole, eg mortgage interest and rates, the farmhouse expenses will first need to be determined. This is calculated using the cost of the farmhouse relative to the total cost of the farm. Once this is established then the farmhouse expenses are apportioned between the private and business use of the farmhouse (type 2 farms only - see below)
To reduce the compliance costs for farms with a low private-use element, Inland Revenue have classified farming businesses as:
Type 1 farm - farming businesses where the value of the farmhouse (including curtilage and improvements) is 20% or less of the total value of the farm
Type 2 farm - farming businesses where the value of the farmhouse (including curtilage and improvements) is more than 20% of the total value of the farm
The total value of the farm includes all blocks of land (such as run-offs) which are farmed together as part of the same farming enterprise.
For farmers operating type 1 farms the Inland Revenue will accept that 20% of the farmhouse is used for business purposes. If you believe your business percentage should be higher you will need to do the actual calculation to work out your business use percentage. Type 1 farms may continue to claim 100% deduction on rates and mortgage interest.
The type 2 farms will need to calculate the business use of the farmhouse as there is no minimum percentage provided by Inland Revenue. This home office calculation must be based on the actual use (time and space used) of the farmhouse for business. This percentage can then be applied to all general farmhouse expenses that cannot easily be dissected, such as power, dwelling insurance and repairs and maintenance. Only the home office percentage can be claimed for mortgage interest and rates relating to the farmhouse. For example, the dwelling and curtilage makes up 25% of the total farm value, of which the home office comprises 15% of the dwelling, therefore you will be able to claim 15% of 25% of the mortgage interest and rates. The remaining 75% of the mortgage interest and rates is attributed to the farm itself and is therefore fully claimable.
Telephone rental and fixed line charges can no longer automatically be claimed 100% for business. The starting point is that you can claim 50% of these charges. You can still claim a higher percentage if you can show the actual business use of the telephone is greater than 50%. If there are two telephone lines, one charged at a domestic rate, the other at a commercial rate, you will be able to claim 100% of the commercial rental but none of the domestic rental.
If you wish to discuss any of the above with regard to your specific circumstances, please contact one of our friendly advisers.
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