A VAT specialist has welcomed what it describes as a “groundbreaking” ruling in favour of a bed and breakfast business run by an Essex farmer’s wife.

The business, based near Saffron Walden, nearly foundered after HMRC decided to charge VAT on the rural diversification, arguing it should be treated as part of the farm business.

But information service company Wolters Kluwer took up Danielle Forster’s case and a hearing ruled in her favour.

After the decision, HMRC denied it was a groundbreaking ruling, arguing it was “an isolated tribunal decision relating to a specific set of circumstances”.

Wolters Kluwer argued their client had run the business since the early 1970s from the family’s farmhouse, while her husband, and later her son, took care of the farm. She was a sleeping partner in the wholly separate farm business.

The B&B traded well below the VAT-registration threshold, currently �73,000, for decades without attracting any comment from visiting VAT officers. Following the most recent inspection, the HMRC, as part of its ‘rural diversification project’ used its powers to compel Mrs Forster’s business to be ‘aggregated’ with the farm. As she knew it would be uncompetitive to raise prices, the 20% loss in income threatened to put an end to the business.

The British VAT code rules were designed to avoid ‘business-splitting’, where a business trading slightly above the threshold separates activities so that each business remains below the tax trigger point, meaning a non-VAT registered business can charge 20% less or achieve much higher margins than its VAT registered competitors.

Mrs Forster was covered by a fee protection policy, which paid for all the case costs.

VAT litigation specialist Glyn Edwards, of CCH Fee Protection, which is part of Wolters Kluwer, said: “CCH have been asked to defend a number of farming clients facing the same issue, apparently as part of a revenue-raising project organised by HMRC. This judgment will make it much easier to resist HMRC’s attempts to target small stand-alone businesses run by, in this case, a farming family member.”

HMRC said it could not discuss individual cases, but it did apply rules fairly and consistently and where customers disagree with it, they can take the case to tribunal.

The National Farmers’ Union’s head of taxation Michael Parker said the decision was “very positive” and should ensure HMRC carefully review further cases it may be planning, but warned VAT rules around ‘artificial’ separation of businesses were complex.