Rural Intelligence
for
Farms & Estates SPRING 2021
Introduction Welcome to Albert Goodman’s spring farms and estates newsletter. The economy is starting to open up again, and hopefully soon we will have had a large bounce back and all have a spring in our steps. I find some of the economic figures to do with the pandemic astonishing. The economy slumped by 10% in 2020, and most amazingly the government borrowed around £350 billion last year and will borrow a further £234 billion this year. In total that is over £8,500 for every person in the country. Whilst there are some economists who suggest that our Government does not have to repay this money, there are many others who say they must repay it. No wonder we were all nervous when the budget was announced on 3 March 2021. How can the Government balance the books? The budget did announce increases in company tax up to 25% but most other taxes remain untouched for the present. Maybe that was because we are still amid the pandemic. Capital gains and inheritance taxes are both relatively benign at the moment. They may not remain that way and there is likely to be another budget in the autumn. If you are considering passing assets onto the next generation, or contemplating the sale of capital assets, maybe now is the time to act. In our newsletter we have a large collection of articles of a tax and practical nature, which I hope you enjoy.
Iain McVicar Partner and Head of Farms & Estates, Albert Goodman
GETTING THE TERM RIGHT
first time!
We often see farming businesses short of cash and refinancing existing borrowings over a longer term to help cash flow. For most cases, this is because the original borrowing was taken out over too short a term. When taking new borrowing, it is important to consider the appropriate borrowing terms for both the asset being purchased, or invested in, and the business. It is often the case that the asset purchased and financed suits a longer term of lending and, if financed on shorter terms, the business cannot afford the repayments after considering other areas of reinvestment that are needed for the business. Where borrowing is taken out over too short a term it often results in the business increasing its overdraft or having to fund more machinery reinvestment on hire purchase agreements. Hire purchase agreements often make this problem worse as the monthly cash commitments continue to degenerate cash flow. Example Tom Stone Farming is purchasing an additional 45 acres of farmland for £360,000. This land is usually rented each year. Therefore, there will only be a minimal rent saving to each year of approximately £6,500. The business doesn’t have any cash to buy the land and is therefore considering its options for financing the land on a commercial loan. The bank has come back with the following options for the business: Term
Repayments & interest £/month
£/year
10 years
3,645
43,740
15 years
2,663
31,956
20 years
2,182
26,184
25 years
1,900
22,800
30 years
1,719
20,628
If we consider the how long the term of the funding should be based on the asset and business: 1. The asset The asset is farmland. Farmland would suit longer term lending as it’s life is infinite. Farmland historically has always risen in value and therefore long term borrowing shouldn’t affect the residual value. This would mean that the based on the asset the lending should be 20 years and over. 2. The business We do not know the profitability of the business but on the basis that the bank is offering all lending terms then we can assume it is very profitable and does generate a cash surplus each year. However, the business has no cash to invest in the land and therefore we must assume that the cash surplus is being reinvested in growing the business. With the land purchase only resulting in a cash saving of £6,500 of rent then the majority of the cash for the repayments will need to come from the existing business. The business would therefore suit a longer term of 20-30 years. In summary, the new borrowing should be on a term of at least 20 years. Instead, we might see businesses making the decision to repay the debt over 10 or 15 years. Each of these terms, when being compared to say a 25 year term, would adversely affect cash by an extra £1,745/month (£20,940/year) or £763/month (£9,156/year). The barrier to taking a longer term is often the extra interest payable. However, it is important to remember that you will get tax relief on the additional interest and with fixed interest rates are currently very low. You should back your business to gain you a better return on the initial cash flow savings of the longer term rather than repaying a loan quickly and having less cash to reinvest in the business.
Tom Stone Farms & Estates Team tom.stone@albertgoodman.co.uk
Natural capital
- the tax issues A lot of has been written in the national and agricultural press on natural capital - assessing and measuring natural capital assets and how this should be calculated based on land use, soil type, habitat and agricultural activities etc. But also, on the opportunities that natural capital assets could provide the agricultural sector.
The UK has legally committed itself to reaching a 100% reduction in net greenhouse gas emissions by 2050. The agricultural sector could play a vital role in this, not by reducing emissions, although the agricultural industry will need to play its part, but by providing a route for carbon offsetting. To achieve a 100% reduction in its carbon account, the UK needs to reduce greenhouse gas emissions, or increase the capture of greenhouse gases, to the tune of an average 15.5 million tonnes per annum over the next 30 years. According to the ‘Commission on Climate Change – reducing UK emissions; progress report to Parliament’ (June 2020), emissions by sector the previous year in the UK were split as follows: Sector
%
Transport
24
Industry
21
Buildings
18
Energy supply
12
Agriculture (Land)
9(2)*
Aviation
8
Shipping
3
Waste
4
Fluorinated gases
3
*The land sector within agriculture naturally captured 2% of the UK’s 2019 GHG emissions, making the sector’s net contribution 7%. The government as well as the corporate and private sector are taking more notice of the economic value of natural capital and we are seeing more clients being approached by investors wishing to increase corporate sustainability and offset carbon.
Landowners monetising natural capital assets either through government schemes or through private investment need to consider the tax issues whilst we wait for changes to tax legislation. As a member of the CLA National Tax Committee I know the CLA are working hard lobbying government for changes to ensure tax is not a barrier - DEFRA and the Treasury are now actively working on this. For now, the issues are the tax treatment of the payment(s) received and the long term impact to the taxation of the land for capital gains tax (CGT) and inheritance tax (IHT) purposes. Income received The payments received for allowing land to be planted for trees or set aside for meadows, marshes or phosphate lakes, for example, will depend on the nature and terms of the agreement. Without specific legislation to deal with these situations the tax treatment of a one-off payment or annual payments over a period of time will depend on the wording of the contracts. The contract may be a lease to a third party or an alternative arrangement. With a lease the payments received could be deemed to be rental income so potentially non-trading/farming income. If there is an upfront premium, depending on the length of the lease, part of the premium could be charged to CGT and a large proportion to income tax in a single year, which could result in a substantial tax liability charged at higher income tax rates. For other contracts the payment received could be treated as a capital payment on the basis the land has been devalued and so chargeable to CGT. Alternatively, if a devaluation of the land cannot be argued, the payment could be charged, as farming income, to income tax. This would be on the basis the payment is to compensate for loss of income that could have been generated had the land remained in agricultural use. With the latter you
If the land is not deemed to be in agricultural occupation and the activities involved on the land to secure the income are minimal then the land is unlikely to qualify for reliefs for CGT or IHT purposes. For woodland to qualify for BPR it needs to be managed commercially. If it only has amenity use or biodiversity relief it will not qualify. Conclusion
would then wish to argue the spreading of the taxation of the payment over the term of the contract to avoid a large higher rate tax liability in one year. As farming income it could also continue to qualify for farmers averaging. Whether the income is deemed to be trading or not will depend on whether the income is deemed to be farming, and if not, whether there is enough activity involved to secure the income. Otherwise, the income could be treated as income from holding land, i.e. like rent. Capital tax position Land farmed in hand and occupied for the purposes of agriculture qualifies for a multitude of CGT and IHT reliefs. For CGT purposes the land should qualify for rollover relief, holdover relief and business asset disposal relief. For IHT purposes the land should qualify for agricultural property relief (APR) and business property relief (BPR). Even if the land is rented to a third party, and in agricultural occupation, the land can qualify for CGT holdover relief and IHT APR. If the land is no longer occupied for the purposes of agriculture many of these reliefs could be lost going forwards. There is specific legislation to allow APR on land within old set-aside and habitat schemes but these schemes closed in 2000 and the legislation has not since been updated to cover new schemes or ELMs.
Whilst there is likely to be huge opportunities for landowners, until we have specific legislation, to protect the CGT and IHT reliefs currently secured on the land, tax is likely to be a barrier for some to enter the schemes. As always, tax should not be considered in isolation and commercially these deals often make sense. The wording of the contracts and the amount of activity required on the land to secure the income, will be crucial to protecting the existing reliefs. Ensuring a relevant business plan, to support this, is in place will be helpful. Take advice early on regarding how best to structure the arrangement. Also consider the impact of the potential opportunity on the ‘Balfour’ status of the business. If the land is unlikely to qualify as a trading activity, where the income from it should be received and how the land should be owned going forward should be considered in advance, protecting BPR on the balance of the business. In the meantime, the CLA are continuing to lobby for the Rural Business Unit (arguing that the farm and estate business should be treated as a single business rather than that of farming or property) as well as protecting CGT and IHT reliefs by extending the reliefs to these schemes. They successfully agreed a broader definition of APR recently to include vineyards and orchards, therefore we may see new definitions of agriculture or a new conservation relief in the future. We will keep you posted.
Sam Kirkham Farms & Estates Team sam.kirkham@albertgoodman.co.uk
Herd basis - could this be tax advantageous for farmers? A combination of Covid-19 crisis, Brexit and the imminent transition from direct subsidy support to the Environmental Land Management scheme (ELMs), has bought unprecedented levels of uncertainty to farming, with a big question mark as to what the future holds. However, for livestock farmers who have recently acquired a production herd, using the herd basis of accounting for tax purposes could be advantageous. Whether you operate as a sole trade, through a partnership or trading through a limited company, a farmer can adopt the herd basis. As a rule, farm animals are allocated to trading stock within the annual farm accounts. However, some such animals which are kept primarily for the products they produce, or in breeding cases for their offspring, and as such are treated as capital assets. Therefore the herd is capitalised as a tangible fixed asset. UK tax law recognises this by giving the farmer the option of electing to use the herd basis. Some examples of eligible herds include: Dairy herd
planning tool. It is important to realise that if the herd is then built up in part or in full within five years then the profit would come back into charge for tax. So, for example, if a farmer is approaching retirement or considering ceasing a trade in which an eligible herd is used, if the herd basis had been adopted, he/she can dispose of the herd and make a tax-free profit. It is important to remember the ongoing costs of herd maintenance are fully tax deductible, although the initial cost of the herd is not. The operation of the production herd under the herd basis is more complex, particularly around adding and removing animals from and replacing animals in the herd. In practical terms the cost of any replacement animal brought in is allowed for tax purposes but where the stock numbers are increasing then the value of the animals bought would be added to the capital value of the herd or flock. Ultimately the greater the difference between the initial cost of the herd and its value on disposal, clearly, the bigger the potential tax advantage to be had by adopting the herd basis.
Sucker beef herd
Time limits for election
Breeding flock
A herd basis election must be made in writing to HMRC. The election must be made within two years of the end of the accounting period in which the herd is first kept for a company, or, for income tax payers, by 31 January falling two years after the end of the tax year in which the herd is first kept. An additional year is allowed if the year in which the herd is first kept is also the year in which the farming activities first began, for example a new entrant in to farming.
Laying hens Sheep kept for fleece production Horses kept for breeding However, there are some exclusions, where the herd basis cannot be used including: Working animals Horses kept for racing Flying flocks (kept for resale) Immature animals Animals kept only for fattening and slaughter It is important to note the stock within a qualifying herd does not necessarily have to be of the same breed but must be all of the same species.
The election is irrevocable and so great care must be taken and advice sought when making that decision. The herd basis election is not available to businesses that have had flocks and herd for many years unless there is a partnership change. If the herd basis is not already in place, and you think your business could benefit from it, take advice.
Advantages and disadvantages of adopting the herd basis The main advantage of the herd basis is that any profit/ loss of the herd, or a significant number (>20%) of the animals from the herd, is not taxable. Therefore, the herd basis can be used as an effective, longer-term tax
Amy Gould Farms & Estates Team amy.gould@albertgoodman.co.uk
PARTNERSHIP AGREEMENTS AND WILLS A partnership agreement will always trump the Will in terms of its content and who assets are left too. It is therefore essential that your partnership agreement and your Will agree to one another. It is important to determine what assets are partnership property and which are owned by the partners for use by the partnership and these must be correctly referred to in the partners Wills to ensure that the property is left as is intended. Under the current inheritance tax rules agricultural property relief (APR) and business property reliefs (BPR) are available to reduce any inheritance tax liabilities, where applicable. It is therefore prudent to check how your assets are being left in your Will and even discuss this with the beneficiaries beforehand so that there is no ambiguity when the time comes, to ensure that the beneficiaries of your Will inherit the assets which you are wanting them to, and not end in a legal tug of war. When considering who will inherit your share of the farming assets then you need to determine who will run the business after you are gone or if the business will be sold. The owners of the assets do not have to be the people who run the business but often they are the same people in farming businesses. When considering how to share out your assets to your beneficiaries then you need to decide what is fair, which is not necessarily equal. The sooner that you can have these conversations, and everyone knows what to expect hopefully the better it will be when the time comes. As accountants we do not write Wills or partnership agreements, but we can review them to make sure that they are tax efficient and don’t contradict one another.
James Bryant Farms & Estates Team james.bryant@albertgoodman.co.uk
Capitalising on demand for holidays
in the south west
Whilst the hospitality sector has suffered because of Covid, and restrictions during lockdowns, many foresee a huge demand for staycations in the UK this and future summers.
Alongside increased demand, there has also been an alteration to permitted development rights, Additional days have been introduced where people can utilise land for temporary use for any purpose for 28 days without needing to apply for change of use – so the allowance is now 56 days.
come at a cost. Therefore, before embarking on an investment it is important to understand the market, the volume of demand, its value and competition and what the market demands to attract them to the proposed site. Consideration should also be given to the effect a glamping site would have on the rest of the business.
We are seeing many clients making use of these additional days to capitalise on demand by putting campsites and glamping pods in place. Often these sit well next to a pre-existing diversification such as a farm shop, holiday let or wedding venue. Understanding the financial implications and the time commitments, which could put a strain on other areas of the business, is crucial to success.
As with any diversification we recommend considering the structure the business should be run in and the tax consequences of the diversification. With public coming onto the farm it is important that the risk associated with this is considered and adequately insured. Further protection may be prudent by the use of a limited company or limited liability partnership, protecting the property assets outside of the glamping business.
Whilst campsites and glamping provide a lower cost of entry into a diversified activity, to achieve a highvalue business, attracting rentals equivalent to cottages and hotels, a glamping site demands high-end quality and/or a unique experience and destination. This will
With regard to the tax position, this largely depends on the type of glamping and the services provided with it. Therefore it would be judged on a case by case basis. Where the glamping is the letting out of holiday accommodation rather than the operation of trade the
furnished holiday letting rules may apply. If breakfasts and other meals are provided the activity could be deemed to be a trade. The holiday letting rules and trading rules would allow certain items to qualify for capital allowances, providing relief against profits. Where shepherds huts and other structures are being used for glamping case law suggests these structures are the plant used in the operation of the trade rather than the setting in which the trade is carried on. The investment in the glamping structures should also qualify for capital gains tax rollover relief. Rollover relief allows the deferral of a capital gain on the sale of assets into the reinvestment in new qualifying assets. Holdover relief should also apply if the land on which the glamping is run is gifted in the future. However, the land will no longer qualify for agricultural property relief for inheritance tax (IHT) purposes. Therefore it is important to consider the impact of this. Planning could be put in place, using the appropriate business structure, to ensure the glamping activity forms part of a larger trading activity (such as farming) so that business property relief is available instead. This may result in there needing to be a trade-off between maximising IHT relief and minimising risk by keeping
the glamping activity separate from the farming trade. Therefore other IHT planning may be required. It is also important to bear in mind the VAT status of the glamping activity and the requirement to charge VAT on the income if the income arises in a VAT registered business or if the business is run separately but the turnover exceeds the registration limit, currently £85,000. Whilst VAT registration would enable the VAT to be reclaimed on the glamping structures it effectively results in one-sixth of the income being lost to HMRC, albeit lower rates currently apply. Therefore careful consideration is required to the VAT implications. With more and more people using staycations for shorter breaks, an increased interest for sustainable holidays alongside the future payment for public goods, replacing the Basic Payment Scheme, it seems this could be a continuing growing market that many farming businesses would be in the right place to benefit from. However, take advice and plan ahead first.
Sam Kirkham Farms & Estates Team sam.kirkham@albertgoodman.co.uk
A WELCOME BREAK FOR THE HOSPITALITY SECTOR While furnished holiday lets and the hospitality sector have been severely affected by the pandemic, with forced closures and additional social distancing measures, the extension of the reduced VAT rate will be seen as a welcome break.
On 8th July 2020, the government made the initial announcement, allowing VAT registered businesses to apply a temporary 5% reduced rate of VAT to certain supplies relating to:
Some businesses, such as those that sell alcohol, with very modest food sales, or holiday let accommodation, may find savings by joining the flat rate scheme, even if only temporarily.
Hospitality
The flat rate would be applicable to the whole business and would be determined by the main activity of the business. There are other conditions that would be required and an application to HMRC would need to be made.
Hotel and holiday accommodation; and Admissions to certain attractions This was a temporary measure, relating to supplies made between 15 July 2020 and 31 March 2021. However, in the Spring 2021 Budget, the Chancellor announced an extension to the relief, with the reduced rate of 5% now applying until 30 September 2021. From 1 October 2021, this VAT rate will increase up to 12.5% and from 1 April 2022 it will revert to the standard 20%. To reflect these reduced rates the Flat Rate Scheme percentages have also been reduced. Flat Rate Scheme The Flat Rate Scheme (FRS) applies to small businesses with an expected taxable turnover in the next year of £150,000 or less (excluding VAT). With the FRS, a flat rate of VAT is charged on your gross income. Generally, no VAT can be reclaimed on expenses but, if these are relatively low, the scheme may be advantageous and would provide a reduced administrative burden. Following the temporary reduction in VAT in the hospitality sector, these rates have been reduced as follows: Catering and services, including restaurants 12% to 4.5% (rising to 8.5% from 01/10/21 to 31/03/22) Hotel and accommodation 10.5% to 0% (rising to 5.5% from 01/10/21 to 31/03/22) Pubs 6.5% to 1% (rising to 4% from 01/10/21 to 31/03/22)
Accounting schemes for VAT VAT can be accounted for on the basis of either invoice date or alternatively payment dates using the cash accounting scheme. In summary, cash accounting for VAT means, quite simply, you only pay VAT to HMRC when your customers pay, whereas invoice accounting means that you account for VAT to HMRC when a VAT invoice is raised. For most farmers, where taxable supplies (sales) are zero rated, an invoice basis is normally beneficial, as little or no VAT is due on sales and VAT can be reclaimed on purchases as soon as the invoice is received. Where income is subject to VAT, issuing a VAT invoice in advance means VAT has to be declared in full when the invoice is issued. However, it is not necessary to issue VAT invoices where you customer is a private (nonbusiness) individual. For example, if you provide your customer with a VAT invoice to confirm a holiday accommodation booking, then the total VAT will be payable at the date of the invoice, regardless of when full payment is received. On the basis this is not a business-to-business transaction, you can therefore issue a booking confirmation or similar document to confirm receipt of the deposit, instead of raising an invoice. VAT will then only be due on the deposit, rather than the total booking,
thereby delaying the full VAT liability from the date of the booking to the final payment. Although you have delayed the VAT due to HMRC, by using the invoice basis, you can still claim for the VAT on your purchases as soon as the invoice is raised, rather than when you pay for them, thereby resulting in this additional cashflow saving. To benefit from this system, it is important that you are generating the correct paperwork through your accounting systems. By inadvertently supplying VAT invoices, instead of booking confirmations or receipts, you could be unintentionally advancing your VAT liability. However, with the VAT rates set to rise, there is a situation where raising an invoice in advance could reduce your VAT liability. If a ‘tax point’ can be created while the reduced VAT rate is still in place, then the whole of the supply will qualify for the reduced rate, even if the supply of the services, i.e., the period of stay, occurs after 1 October 2021. A tax point can be created by either receipt of payment or by issuing a VAT invoice. Therefore, if you raise a VAT invoice before 1 October 202,1 for a booking after this date, although this brings forward the VAT liability, as the full value of VAT invoiced will have to be paid when the
invoice is issued, all the VAT will be at the reduced rate. This would also apply to businesses using the cash basis for VAT as cash accounting does not apply to invoices issued in advance. Other schemes In addition to the Flat Rate Scheme, businesses in the hospitality sector may specifically benefit from using one of the retail schemes or the Tour Operators Margin Scheme (TOMS). These are more complex schemes, and care needs to be taken in setting these up. However, in the right circumstances, using a scheme such as TOMS, can provide significant savings. If you would like to discuss any of the VAT schemes mentioned here and how these could specifically benefit your business, or would like to discuss changes to you current accounting systems to ensure you are making the most of these opportunities, then please do not hesitate to contact us.
Kate Hardy Farms & Estates Team kate.hardy@albertgoodman.co.uk
What to consider when setting up a food/artisan business? Over the past year we have seen many of our farming clients diversify into food businesses. This has ranged from selling meat boxes to setting up milk vending machines.
With this diversification, our clients have changed from selling business to business, to selling to business to consumer. This change is exciting and often profitable, but it can raise a wide range of different considerations to conventional farming. What type of entity?
Should we VAT register? The VAT concern for most setting up their business will be whether they can reclaim the VAT on the start-up plant and machinery, such as a vending machine. This can be reclaimed if the business is VAT registered. The trick for new businesses, where their taxable turnover
Most farming businesses trade through sole trades and
is below the VAT threshold of £85,000, is determining
partnerships. This type of entity suits farming and allows
whether for cashflow and profit purposes, being VAT
flexibility over succession and other issues.
registered is worth it.
A food business has a different risk profile to farming. The
The sale of products like milk or meat is a zero rated sale
business is now providing food directly to consumers. If the milk or meat sold has something wrong with it, then
for VAT purposes. This means that VAT does not need to be charged on the sale. However, supplies of food and
the business owners are liable to being sued if customers
drink made in the course of catering are standard rated.
suffer adverse health impacts. If the business was trading
This would include hot food and drink to take-away.
within a sole trade or partnership, then the assets of the owners are liable for the damages.
For those selling a zero rated supply, it is rarely not worth being VAT registered as the business will generally
It is important as business owners you take action to limit
always be in a repayment position for VAT purposes as
the risk on your personal assets.
the business can reclaim VAT on its business expenses
There are two common types of entities that allow you to do this: 1. Private limited company 2. Limited liability partnership These two types of businesses allow business owners to
but not charge VAT on its income. However, for those in catering it is often worth wating until they breach the VAT threshold, and then must register for VAT. For business that are catering food and drink, then more planning is needed to consider whether registering for VAT is right for the business.
limit their risk of having personal assets on the line. Using this type of entity isn’t needed for every business
Should I keep track of the finances?
-you need to consider the size of the business you are
As new business starts it is important to keep good track
running, the value and importance of your personal assets
of your business finances. This is not just because of the
and your exposure to risk - what have you got to lose?
end of year compliance requirements, but also to ensure
that the new venture is generating a cash profit. Using cloud based systems such as Xero, QuickBooks or Sage can help you efficiently maintain the finances and see clearly how the new business is performing. How not to end up with a surprise tax bill? Hopefully the new business does have some tax to pay, this means it is profitable. As part of reviewing the cash surplus it is also sensible to consider the potential tax liability. We have seen business profits in the last 12 months grow 10 fold compared to the year prior. It is therefore important to review this as you go so that you do not get a surprise tax bill. Often, if identified at the time, we can act to reduce the potential tax, but reviewing after the event will leave limited options and a large tax bill. Other points to consider? It is important for you to have sufficient insurance cover, and not just the cheapest insurance provider, as the with the risk of business the insurance provider could save your bacon! Marketing and social media is another key tool for any new food business. Telling a story of the food and the people behind it often generates brand loyalty to the business and repeat sales. Food hygiene compliance is essential for maintaining your insurance policy and keeping the risk of any food issues low. Summary Starting a new business is a great adventure, and for farming businesses can often solve succession issues. It is important to remember the risk that comes with supplying food to the public and to remember that it is imperative to protect your assets.
Tom Stone Farms & Estates Team tom.stone@albertgoodman.co.uk
stud farming
11 YEAR LOSS RULE Stud farming is defined as the ‘breeding and bringing on of horses’ and is regarded as farming for tax purposes. It is therefore subject to many of the accounting rules governing agriculture. Therefore, should your stud farming business ensure full compliance with the definition of ‘farming’ you will have access to a wide variety of valuable tax reliefs. If your stud farm or horse breeding operation is being run on commercial lines, importantly with a view to making a profit, then the trading results are almost certainly taxable as business income, whereas hobby activities are not normally regarded as a taxable trade. Therefore have no tax levied upon them, and likewise any taxable loss is non-allowable. Establishing the stud farm or breeding operation as a taxable trading business with HMRC may result in many of the valuable reliefs for capital gains tax and inheritance tax being available, and may in some cases cover the stud ‘farmhouse’. Loss claims HMRC have been closely reviewing all tax loss claims related to horse breeding. Even more so, when there is little history of a profit and where previous claims have been made to offset any taxable loss against other income, which is otherwise taxed at higher and additional rates (i.e above £50,000) It is a well-known fact, that losses from breeding can often continue for several years. Sports horse breeding is an industry which offers a slow rate of return, in that breeders cannot hurry the birth of a
foal or its training and development. Combining this will the impact of Brexit on the equine industry, many businesses are facing yet more additional costs whilst complying with stringent rules of exporting horses to the EU. Although certainly the prices of horses are somewhat seeing a substantial increase! It is general, if a tax loss has been made from farming and has been for the past five fiscal years, then sideways loss reliefs against income in the current or prior periods shall not be available for losses sustained in any future year, up until the point a further profit is made. However, for stud farms, in recognition of the longer lead time between breeding and sales, the loss period is extended to 11 years, from inception of the stud farm, in which to make a profit. This therefore leads breeders to think that they just need to have made a taxable business profit by the 11th year from starting off and then every 6th year after that. Which although the allowances have been put in place to account for the long-term nature of the trade, there still does have to be proof of commercial motive within the breeding operation, demonstrating with evidence a clear difference to separate a potential profit-making business from the hallmarks of a hobby undertaking.
Amy Gould Farms & Estates Team amy.gould@albertgoodman.co.uk
IS GREEN BEST? When you purchase a car in a company it can be very costly if you have any private use on the car. With a green zero emissions car this may not be the case. Often farmers will keep their private cars outside of the company to avoid having a benefit in kind (BIK) income tax charge. The BIK is based on the emissions of the car and the list price of the car. For the average 4x4 diesel car this can be up to 37%, meaning in under three years the employee will pay for the car in income tax. To choose a green car instead, the BIK can decrease significantly, to 1% of the list price for the 2021/22 tax year, increasing to 2% in 2022/23. Further, the purchase of a new green car would obtain a 100% deduction of the purchase price, from trading profits, which is not available on the purchase of any other type of car. To show the benefits of going green compared below is a Jaguar F-Pace and the Jaguar I-Pace with the director being a basic rate taxpayer. F Pace
I Pace
£41,000
£65,000
£467
£12,350
£15,170
£650
£4,730
£202
Cash cost in year 1
£45,263
£52,852
Cash cost after year 3
£53,871
£53,660
Price Tax relief year 1 BIK Net tax on BIK
Further with the use of a green car, you would need to install charging points. It is possible to do this and receive a 130% deduction on the installation of the new charging points. The installation of green charging points at the employees’ home will also not be subject to a BIK. While a green car will most likely cost more than the diesel version, if the car is bought in the company, it will cost significantly more by year three to buy a diesel car. While we would normally recommend not buying a car, with private use, in a company, if you are going to consider an electric car, it is a lot cheaper to purchase the electric car in a company. If you have an electric car in mind and want to know more details on the tax savings, please contact us.
Andrew Withers Farms & Estates Team andrew.withers@albertgoodman.co.uk
Sustainable farming incentive Following the publication of the Government’s Agricultural Transition Plan in November 2020 further details are continuing to emerge regarding the schemes to replace the Basic Payment Scheme which is due to be phased out by 2027. The sustainable farming Incentive (SFI) is due to be launched mid-2022 to all Basic Payment Scheme recipients. This is one of three new components that will make up the Environmental Land Management scheme (the others being local nature recovery and landscape recovery, both of which will be piloted next year). The SFI will pay farmers for actions they take (going beyond regulatory requirements) to manage their land in an environmentally sustainable way. Actions will be grouped into packages set out as standards. Further details of these standards have now been released as farmers have been invited to make applications to enter a pilot scheme for the SFI which will run from October 2021. During the first phase of piloting participants will select from a set of 8 standards to build their agreements. Within each standard there will be three levels for participants to choose from – introductory, intermediate, and advanced. These standards and proposed payment rates are set out below: Standard
Initial base rates (first phase of pilot only)
Arable and horticultural land standard
from £28 up to £74 per hectare
Arable and horticultural soils standard
from £30 up to £59 per hectare
Improved grassland standard
from £27 up to £97 per hectare
Improved grassland soils standard
from £6 up to £8 per hectare
Low and no input grassland standard
from £22 up to £110 per hectare
Hedgerow standard
from £16 up to £24 per 100 metres
On farm woodland standard
£49 per hectare
Waterbody buffering standard
from £16 up to £34 per 100 metres
The idea of this approach is to enable farmers to develop an agreement that works for their business. It is also planned for the scheme to expand over time. It will start with a core set of sustainable farming actions, which will build incrementally as more funding becomes available from the reductions in BPS payments. Further information will be forthcoming in the summer as to the details for each standard and the 3 different levels. The payment rates for these options are also being continuously reviewed prior to the launch in 2022. In the meantime, the countryside stewardship scheme remains available for those wishing to enter a scheme sooner and ‘plug the gap’ that will be left from diminishing BPS payments. DEFRA have stated that anyone in a countryside stewardship scheme that starts after January 2021 who secures a place in the environmental land management scheme will be able to withdraw and transfer to the new scheme with no penalty at agreed exit points.
Jenny Batchelor Farms & Estates Team jenny.batchelor@albertgoodman.co.uk
Super-deduction for companies
When you purchase a car in a company it can be very costly if you have any private use on the car. With a green zero emissions car this may not be the case. To encourage investment in the economy over the next two years, a new 130% ‘super-deduction’ capital allowance has been introduced for purchases of new plant and machinery from 1 April 2021 until 31 March 2023. The super deduction will only apply to limited companies on purchases of new plant and machinery, not used or second hand. When the asset is later disposed, the company will have to treat this as a separate pool item and bring 130% of disposal proceeds into account suffering a balancing
charge at that point, rather than suffering tax on sale proceeds over a much longer period of time. If the disposal takes place after April 2023, when the corporation tax rate is set to rise to 25%, for businesses with profits over £250K, this measure will in fact mean the company may suffer a net cost depending on how the value of the purchase depreciates. The table below sets out the tax saving when a new tractor is purchased before April 2023 and the tax charge when the tractor is sold after April 2023.
Profits
<£50K
£50K - £250K
> £250K
£
£
£
24,700
24,700
24,700
19%
26.50%
25%
£75K
18,525
25,838
24,375
£50K
12,350
17,225
16,250
£25K
6,175
8,613
8,125
Relief on tractor purchased for £100K before April 2023 at 19% Corporation tax rate after April 2023 Tax charge when sold for:
As you can see, for those businesses where profits are over £50K, selling the tractor whilst it is still holds the majority of its value results in a net tax cost of £1,138 or a very small saving for those with profits > £250K.
The annual investment allowance will continue to apply for second hand purchases up to 31 December 2021. The annual investment allowance provides 100% relief for plant and machinery purchases of up to £1,000,000.
Farm businesses hoping for a ‘super deduction’ from the investment in the purchase of plant and machinery should consider this situation and how this may affect their plans. For machinery that is traded in regularly, and has potential to hold its value, this relief may need to be viewed as an upfront cash flow saving only.
As always, the decision to purchase machinery must be a commercial one, and not based on tax.
Sarah Cleave Farms & Estates Team sarah.cleave@albertgoodman.co.uk
SUSTAINABLE INVESTMENTS As owners and custodians of large areas of land, farms have always been businesses that are inextricably linked with countryside and the environment. It comes as no surprise that interest is high for more sustainable investment solutions. For those so minded and with surplus funds, to invest for the future, investing in a more sustainable way is becoming a hugely more important part of the investment landscape. It is also evolving. In the past some ‘ethical’ funds have simply acted to exclude certain companies, allowing investors to sleep more easily at night, but recently sustainable investments (and to a lesser degree all fund providers) have started exerting more pressure on firms to report their sustainability credentials, and then improve them. Some firms, like AG, are acting on their own accord to improve their environmental credentials, others need more encouragement, and money talks. Finance and investment is one of the biggest influences on corporate change. Which is why, amongst the many other things we at AG do to become more sustainable, we have our new portfolios, which maintain our core investment beliefs, maximising returns for a given risk profile, but with a sustainable outlook. The portfolios are called ESG Portfolios, or Environmental, Social and Governance, and aim not only to be more sustainable from an environmental perspective, but also consider social issues such as healthcare, safety and rights of employees, as well as governance issues such as bribery and business ethics. The funds can be accessed via most of the usual investment channels, and there is a range of investment risk portfolios available, from Cautious to Adventurous, to suit most risk profiles. The level of risk will also depend on how long the funds are to be invested. We strongly believe we have an opportunity to make changes to improve the world, and the portfolios are making positive change. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
David Scull Financial Planning Team david.scull@albertgoodman.co.uk
Providing farm workers with accommodation - time to review your situation
Farmworkers and retired farmworkers who live in accommodation provided by their employers could face extra tax charges from April 2021 as H M Revenue and Customs have tightened the rules on exemptions. The last concession relates to posts that existed before 6 April 1977 and to anyone who has taken over that role since. They provided relief from a taxable benefit in kind for employees, who were required to live in the property as a condition of their employment. Employers who provide such accommodation under the previous concession, of which no taxable benefit arose, due to employees being required to live in the property as a condition of their employment, should now consider whether it still continues to qualify as a tax-free benefit under one of the statutory exemptions below: Necessary for the proper performance of duties; or Customarily provided for the better performance of duties; or (normal practice to provide living accommodation to at least 50% of employees of that class) Required for the personal security of the employee It is thought many farm workers should be covered by the ‘necessary for the proper performance of duties’ exemption, but there could be issues for other positions such as estate and farm managers, gamekeepers and property maintenance staff. To avoid any tax implications for the employers and their employee it is advised to have a solid argument formed as to why the provision of the accommodation is exempt. It is also advised to have solid evidence showing the proper or better performance of duties to enable an exemption claim; this could be in the form of physical evidence, for example keep timesheets showing night calving checks, or call outs to such situations. Merely writing conditions into employment contracts will not be sufficient. This is more difficult for retired employees who were covered by the old concession. CLA is lobbying treasury to clarify whether they will still be covered. If you have any examples of these kinds of cases please let us know.
Amy Gould Farms & Estates Team amy.gould@albertgoodman.co.uk
From field to office
- a career as an agricultural accountant?
With my previous articles having a more practical emphasis on some of the decisions that farmers make, this article is focussed on a decision that I made to retrain as an accountant. Having been at Albert Goodman over 2 years I felt that now would be an appropriate time to share my experience of transitioning from the role of farm manager to trainee agricultural accountant. I would also like to address the question I get asked the most often which is ‘what it is like to move from working on farm to being in an office all the time?’ and to displace some of the misconceptions I have encountered. One of the biggest misconceptions I had before retraining to be an accountant was that no accountancy practice would be interested in me due to a lack of finance or accountancy background. I therefore believe that it is important that I outline my previous experience to demonstrate this myth. After graduating from Harper Adams University with a BSc Hons degree, working on several farms both in England and Australia I was fortunate to progress to a farm manager role on a large estate in Northamptonshire. I was unfortunately made redundant due to unforeseen circumstances and due to commitments to my family farm decided I would move home and retrain. Accountancy as a profession, like any other, has its pros and cons that are specific to each individual. I will summarise my experience and how I offset the cons.
PROS
CONS
Clear career progression ■ Regular meetings between managers/partners discussing how to achieve promotions in role and salary. ■ A longer career ladder allows provides early/more regular promotions/ success plus higher earning potential. Flexibility/Structure ■ Flexible working policy and working from home allows me to work around other commitments. ■ Work is not as seasonal/weather dependant allowing social plans for evenings and weekends. ■ Employers who I feel comfortable asking to be flexible to suit my personal requirements. Working as part of a team ■ More social contact to make the workplace an enjoyable environment and reduces potential isolation by working alone. Becoming a qualified professional Potential to gain a new qualification and become a chartered accountant ■ To be a valued contact of farmers. ■ Ability to positively impact a wider range of people.
Working Inside ■ Albert Goodman allow me unpaid time off to work on farms during the harvest period. ■ Typically being able to visit different farms for meetings (pre COVID-19) provides a break. Fear of not knowing ■ A well-designed support network of colleagues helps me overcome and problems I can’t solve alone. Repetitive work ■ A mixture of different farms, managers and work keeps me challenged.
Mentally challenging ■ Learn more about finance and accountancy that will benefit my future in the home farm.
To summarise, my transition into accountancy has been a huge personal challenge in which sometimes I have struggled. However, the achievement of success after periods struggling feels much more rewarding. Mental fortitude, the ability to listen and to be prepared to not know the answers must not be understated and soon you’ll find yourself in a position to help others. If you are considering a change in career, I would recommend weighing up your individual pros and cons, with employer flexibility in mind. I have taken great pleasure in sharing my industry experience with my colleagues and using my practical farming knowledge to benefit my professional career. Please feel free to contact me by phone or email for a confidential chat to answer any questions you may have.
James Reader Farms & Estates Team james.reader@albertgoodman.co.uk
Types of asset finance and their tax treatment The three main types of asset finance are hire purchase, finance lease and operating lease. There are several other names for asset finance such as personal contract purchase (PCP), which is a finance lease and at the end of the agreement you have an option to buy the asset. This is usually associated with private motor vehicles. A hire purchase is where you own the asset from the start of the agreement. You pay any VAT due on the asset at the start of the agreement, agree the payments over a set period and can claim the tax allowances (capital allowances) on the asset, if applicable, at the date of its first use in the business. If you are buying an asset which will not be used straight away, then the tax allowance claim will be delayed until it is first used. A finance lease is where you don’t own the asset unless there is an option to purchase it at the end of agreement. VAT is paid on the repayments throughout the length of the agreement. At the end of the agreement there is a secondary rental period where you pay a set fee, usually on an annual basis. As you don’t own the asset the tax allowances can’t be claimed. The asset is a fixed asset on the balance sheet and the depreciation, and any interest charged are tax deductible. An operating lease means that you are hiring an asset over a set period. The costs go straight to the profit and loss account. You will never own the asset and you give it back at the end of the agreement. VAT is charged on the payments. In summary these are the main differences between the agreements. Hire purchase
Finance lease
Operating lease
Asset on balance sheet
Yes
Yes
No
Capital allowances claimed
Yes
No
N/A
Payments in the Profit and loss
No
No
Yes
Depreciation costs tax allowable
No
Yes
N/A
VAT claimed on payments
No
Yes
Yes
VAT claimed on the value at the start
Yes
No
N/A
Interest tax allowed
Yes
Yes
N/A
James Bryant Farms & Estates Team james.bryant@albertgoodman.co.uk
XERO TOP TIP
- how to deal with hire purchase and operating lease postings Hire purchase agreements and operating leases have their differences with regards to the ultimate ownership and terms of the agreements but also the bookkeeping and the VAT treatment between the two is different. With a hire purchase agreement, the ownership of the asset passes to you and so it is included as a fixed asset addition when the agreement is entered in to. As in the below example of a bill for a tractor purchased on hire purchase you will post the total value of the new asset (including VAT at 20% if applicable) to your fixed asset addition code and on the next line post the amount of credit forwarded (with the use of the negative symbol) to the hire purchase liability code. This should leave you with a balance being the deposit you paid; this will be the VAT element that’s payable on the new asset. You will have therefore reclaimed all the VAT on this asset at the date of the bill. All subsequent repayments of this agreement are to be coded to the same Hire Purchase liability code, much like you would with loan repayments, as it is reducing the amount you have outstanding to be repaid to the finance company. The critical thing is that No VAT should be the VAT rate selected. You cannot reclaim the VAT on these payments as you have already reclaimed it on the lump sum amount for the entire asset.
With an operating lease, ownership will not be passed to you at any point during the lease period or thereafter. There is therefore no fixed asset addition taking place, instead all payments are expenses. The initial and subsequent periodic payments, which are typically monthly or quarterly, are to be coded to an overhead code with a suitable title such as “Operating lease”. VAT, if reclaimable for the asset, should be coded at the Standard rate of 20% on expenses and will then be reclaimed each time a payment is made.
Charlie Green Farms & Estates Team charlie.green@albertgoodman.co.uk
Contact us
Iain McVicar Partner E: iain.mcvicar@albertgoodman.co.uk T: 01823 250283 Iain is the head of Albert Goodman’s Farms and Estates team, Iain manages our large team of agricultural accountants and business advisers and has a strong practical background in agriculture, with extensive experience of helping agri-businesses across the country.
Sam Kirkham Partner E: sam.kirkham@albertgoodman.co.uk T: 01823 250350 A chartered certified accountant and chartered tax advisor Sam specialises in tax planning for agricultural businesses and estates, particularly capital taxes including capital gains and inheritance tax. She also advises high net worth individuals and investors on land and property transactions and is a National Tax Committee of the CLA and Vice Chair of Somerset Committee.
Kate Bell Partner E: kate.bell@albertgoodman.co.uk T: 01823 250286 Agriculture is very much a passion of Kate’s as well as a career with her spending some holidays working either on parents and farm or her husband’s farm. Kate also helps with some agricultural discussion groups and charities. Kate enjoys working closely with her clients to help them with long term business and personal decisions as well undertaking various tax planning projects.
James Bryant Senior Manager E: james.bryant@albertgoodman.co.uk T: 01823 250372 Before qualifying as an accountant James worked on a variety of farms throughout the country, while studying for a degree in Agriculture. James takes an individual approach to every business whilst drawing on the experience that he has gained from past scenarios in order to provide key advice and support to clients.
Tom Stone Senior Manager E: tom.stone@albertgoodman.co.uk T: 01823 250397 Tom provides accountancy and tax advice to a wide range of farming clients ranging from large estates to owned occupied and tenanted family farming businesses across the South West. Tom regularly leads commercial financing advice to farming businesses, helping to add further value to both existing and new clients on top of the conventional compliance related accountancy work.
Kate Hardy Manager E: kate.hardy@albertgoodman.co.uk T: 01305 752064 Kate works closely with rural-based and small business clients in the Dorset and Somerset area, together, specialising in rural diversified businesses such as furnished holiday lets and commercial lettings.
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