Understanding the VAT and Capital Tax Implications of Diversifying into Dog Parks and Dog Walking Areas
Many of our farming clients are looking to diversify their income streams, and a current trend we are seeing here at Ellacotts is the admission to walking areas specifically for dogs and ‘dog parks’. We often get asked whether this is a taxable supply for VAT purposes and how the change of use in the land impacts reliefs for Capital Tax purposes.
VAT
The key issue in determining the VAT liability in these scenarios is whether the arrangement constitutes a licence to occupy land or the provision of facilities. A licence to occupy land is generally exempt from VAT, subject to an option to tax being exercised, whereas the provision of facilities is subject to VAT at 20%.
To assess whether a supply is a VAT exempt licence to occupy, the following factors should be considered:
- Exclusivity: Does the user have sole access to the space during their booking?
- Designated area of land: Is the area specifically allocated for this purpose?
- Passivity of the supplier: Is the supplier’s role limited to granting access, without providing any active services?
To qualify as a licence to occupy, the supply should involve no more than the passive act of granting exclusive use of the land. For example, a dog walker is granted sole access for the duration of their booking for an agreed price. The provision of waste bags, basic treats and water facilities does not constitute an active service but is a better means of enjoying the space. If there are no additional charges or further human involvement beyond granting access, this arrangement is likely to qualify as a licence to occupy land, making it exempt from VAT under Schedule 9, Group 1 of the VAT Act 1994.
On the other hand, areas marketed as ‘dog parks’, exercise or play areas which include additional facilities, will likely impact the VAT liability. For instance, the supply of land which includes structures or apparatus such as tunnels, ramps, slides, see-saws and other obstacle-type features, i.e. tyres, or straw bale jumps, would likely be deemed a supply of facilities. The supply of land would no longer be considered ‘passive’.
Further to this, the provision of any form of training via human involvement would also tend to be considered a taxable supply at 20%, as would allowing multiple admissions for the same plots. The supply of land would therefore be deemed incidental to the primary offering detailed above.
Inheritance Tax
The change in use of the land will have Inheritance Tax (IHT) implications.
Agricultural Relief
In most cases, the original use of the land was that of agricultural purposes, likely grazing of livestock, which would have met the criteria for Agricultural Relief (AR), provided that the ownership and occupation conditions had been satisfied. With the land changing use to facilitate a ‘dog park’, it would no longer be deemed to be used for the purposes of agriculture, and so AR would not be available.
Albeit that land could be converted back to meet the ‘purposes of agriculture’ condition of AR by putting the land back into agricultural use when required. The ownership and occupation conditions would also need to be satisfied to reinstate the AR status of the land.
Business Relief
As we have established above that land occupied for the purposes of a ‘dog park’ would not obtain AR, it should then be assessed whether the land meets the conditions of Business Relief (BR).
If the dog park is operating as a separate business and not as part of the main farming partnership, that business would be assessed as to whether its activities are ‘wholly or mainly’ that of trading or investment. Broadly speaking, is the business providing additional services (trade) to the dog park or earning passive income from the land with minimal input (investment).
Predominantly, the dog park will be self-sufficient, and it is likely that HMRC would, in most cases, assess this to be an investment business comprising the activity of collecting rent for the letting of land. In such circumstances, BR would be denied.
The VAT treatment of the land may have some impact on the claim for BR. If the land is deemed to be VAT exempt under ‘licence to occupy’, then it would be more difficult to argue that services are being provided in addition to the letting of the land, and BR would likely be refused. Although if the land is treated as ‘a supply of facilities’, there is some further consideration as to the extent of those services and if this could then be viewed as a business which would attract BR.
If the dog park is being run through an existing partnership structure, then it would be necessary to assess all of the partnership activities as a whole to determine whether the partnership’s activities in the round are ‘wholly or mainly’ that of trading or investment. The principles applied in the “Balfour” tax case provide a framework often referred to as the “Balfour Matrix” which can used to assist in this determination. If the partnership is deemed to be a trading partnership, then the dog park, although possibly deemed as an investment activity in isolation, would qualify for BR through being a component of the overall trading partnership.
Capital Gains Tax
The change in use of the land will also have Capital Gains Tax (CGT) implications.
Gift Holdover Relief
Subject to meeting the necessary conditions, this relief can be available on assets qualifying for AR or business assets disposed of otherwise than at arm’s length bargain.
For example, land used in a business forming part of the agricultural trade that is ‘actively farmed’, can qualify for the relief under both the AR and business asset conditions. Where gift holdover relief is claimed, the CGT liability is postponed until the transferee subsequently makes a chargeable disposal – the transferee acquires the base cost for CGT purposes of the transferor.
With a dog park, as noted above, the conditions for AR are not met, and so a claim for gift holdover relief on this basis would be denied. Furthermore, if the activities carried out do not constitute a trade but instead that of an investment activity, a claim for gift holdover relief under the business asset conditions would also be denied.
Consequently, land occupied for the purposes of a dog park at the time of a disposal otherwise than at arm’s length bargain would be subject to CGT on the taxable gain arising, even where no consideration is received.
Business Asset Rollover Relief
Business Asset Rollover Relief can be available where a gain arises on the sale of a business asset and the proceeds from the sale are reinvested into a qualifying asset within the required timeframes. Land that has wholly been used for the ‘purposes of the trade’ for the duration of ownership can qualify for the relief, for example, if it has been grazed or actively farmed. Land that is rented out does not meet the trading requirements for the relief.
For dog park’s therefore, the land is likely to not be determined as being used for the ‘purposes of the trade’ and if that land is sold, the rollover position would be restricted or not available in its entirety. Where land has previously been used for the ‘purposes of the trade’ and later converted to a dog park, the rollover relief is restricted to the time the land has been used for the ‘purposes of the trade’.
Needless to say, there are many aspects to consider if you are thinking about diversifying into dog parks, and the facts attached to each will form the basis of the tax treatment accordingly. If you would like more information concerning the tax implications of dog parks, or any advice on this article, please contact us by emailing solutions@ellacotts.co.uk or call us on 01295 250401. You can also contact us here with your query, and we will get back to you.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
