Rural Intelligence
for
Farms & Estates AUTUMN 2021
Introduction Welcome to the Albert Goodman Farms and Estates team Autumn newsletter. In general, it has been a good year to be a farmer. Prices overall are decent and most farms that we see are generating enough profit to live and reinvest in the business. There are signs of inflation moving into the economy with the August inflation figure at 3%. Looking back at the statistics, this is the highest figure since 2012. Anecdotal evidence from speaking to farmers suggests that on farm inflation may be higher still. I have heard many farmers thinking that they are at 5% inflation or more. This will have an impact on future profits as higher costs will squeeze margins unless farm commodity prices also rise. With the economy generally doing better now, and inflation creeping in, I think the Bank of England will take some action soon. This may be in the form of reducing quantitative easing, but I also think that the bank base rate may start to rise. The bank base rate has been at 0.1% since 19 March 2020. In 2022 I envisage that this could rise to nearer 1%. Whilst this does not sound much a 1% increase in borrowing costs £1,000 in interest for each £100,000 you have borrowed. Remember that base rates of 4% were the normal until 2008. Maybe now is the time to start to think about getting your finances in order. Our newsletter contains a variety of articles relevant to farm and estate businesses. I hope you enjoy reading them.
Iain McVicar PARTNER AND HEAD OF FARMS & ESTATES TEAM
DEATH BY HIRE PURCHASE AGREEMENTS
As well as talking through the profit and loss account of each farming client, we also focus on the cash flow statement. Cashflow management is important for most farming businesses, due to the amount of capital invested in stock, machinery, and land. Given the day to day investment required, most farming businesses have a significant amount of loans, working overdrafts and/or hire purchase arrangements. The latter is often a less well managed source of finance. Hire purchases arrangements are a useful and essential source of finance for machinery and tractor purchases. We do also see them used to purchase livestock and fund short term cash requirements when other financial providers will not. In recent years we have seen a vast increase in the cost of machinery and tractors and therefore an increase in the hire purchase liability and the monthly payments due. This, coupled with the demand for having new machinery, has resulted in some farming business having substantial monthly repayments to make. I recently reviewed the historic “UK Farming accounts”. This showed that from 2000 to 2018 the total amount of hire purchase debt in agriculture had increased by over £1bn and to over £1.5bn. It is therefore key for businesses to review their current arrangements to see whether they can firstly manage
with the current commitments and whether they can afford new ones. A simple way of looking at this for any business is to open your last set of accounts and complete the following formula: £X Profit or loss for the year
X/(X)
Add : depreciation
X
Add : finance costs
X
Add : one off costs
X
Less : one off income
(X)
Less : drawings
(X)
Cash trading surplus / (deficit) after drawings
X/(X)
Less : annual loan payments
(X)
Less : annual hire purchase payments
(X)
Approximate cash surplus / (deficit)
X/(X)
TOM STONE Farms & Estates Team tom.stone@albertgoodman.co.uk
STAMP DUTY LAND TAX – RESIDENTIAL PROPERTY TIPS AND TRAPS Despite the lack of housing, we have seen a trend of focus by government on making residential property purchases less attractive. This includes higher capital gains tax rates, 30-day capital gains tax reporting and payment deadlines, restrictions to tax relief on mortgage interest, and higher rates of stamp duty land tax (SDLT). However, over the last year government introduced an SDLT holiday with savings for purchasers of residential property during the pandemic. These savings ended on 30 September. The rates returned to the following:
RATES FROM 1 OCTOBER 2021 Residential property or lease premium or transfer value
SDLT rate
SDLT Higher rate
Up to £125,000
Zero
3%
The next £125,000 (the portion from £125,001 to £250,000)
2%
5%
The next £675,000 (the portion from £250,001 to £925,000)
5%
8%
The next £575,000 (the portion from £925,001 to £1.5 million)
10%
13%
The remaining amount (the portion above £1.5 million)
12%
15%
As an example, if you purchase a residential property for £500,000 the total SDLT will be £15,000 if it is your only or replacement property. However, if you are purchasing an additional residential property there are higher rates of SDLT. Using the same example, the SDLT will be double, £30,000, if it is an additional residential property! THE SDLT RATES FOR NON-RESIDENTIAL PROPERTY ARE: Property or lease premium or transfer value
SDLT rate
Up to £150,000
Zero
The next £100,000 (the portion from £150,001 to £250,000)
2%
The remaining amount (the portion above £250,000)
5%
Therefore, the SDLT on a non-residential property purchase for £500,000 is £14,500, lower than both a single and additional residential property purchases. The rules for SDLT are complex particularly when determining the classification of the property (residential or nonresidential) to apply the particular rates and when considering whether the higher rates apply.
FOR THE LATTER THE NET IS CAST WIDELY SO IT CAN CATCH CIRCUMSTANCES WHERE: one spouse already owns a property and they both or the other spouse buys a property; a buy to let landlord purchases their first home; there is a purchase of more than one dwelling which could include annexes and holiday let units; a parent helps to buy their child their first home by reason of a joint purchase; a purchase of a property by a partner in a farming partnership which has let property. It is important to remember that you can be taken to “own” property even in circumstances where you are deemed to have only a small share. It is not uncommon for a farming partnership to own property which is let out and as such, if one of the partners purchases their first home in their own name, they may incur SDLT at higher rates. The cost of helping your children to buy their first home has increased with the SDLT surcharge. However, taking advice and considering the way your help is structured can lower the charge. For purchases of non-residential, or mixed property, the rates may be lower. For example, where a farm is purchased which includes a farmhouse, farm cottages and land, the entire purchase cost could be charged to the lower mixed property rates of SDLT, with no surcharges for additional dwellings. Recently, for example, we have been able to reduce an expected SDLT bill of over £105,000 to less than £25,000. Further, for purchases of six or more dwellings the non-residential rates can apply, with no higher rate charge. In addition to ensuring the correct rate applies to a transaction consideration should also be given to relief from SDLT. This is particularly important if the purchase involves multiple “dwellings”. Relief in such circumstances can reduce the rates of SDLT applying – even in cases where a mixed property is purchased. Due to the complexity of the SDLT legislation, and the perceived misapplication of the rates and reliefs by purchasers, there have been numerous cases on whether a purchase is wholly residential or mixed property and whether there are additional dwellings on which the higher rates should be applied or where relief has been claimed. Therefore, it is important advice is taken early on when buying so the potential SDLT cost is understood.
SAM KIRKHAM Farms & Estates Team sam.kirkham@albertgoodman.co.uk
Partnerships – COMMONLY USED, Although partnerships are the most used business structure within the agricultural community, they are frequently misunderstood and can result in dispute. Partnerships provide great flexibility for decision making, profit sharing and land ownership which can also aid both capital and income tax planning. However, this flexibility can also lead to a lack of clarity whether that be in relation to decision making, profit sharing, business ownership or the legal vs beneficial ownership of land. This article considers land ownership and how, if not clearly documented, income tax planning and profit-sharing adjustments can lead to disputes over the ownership of the business, and assets used in the business.
Land ownership
Share of the partnership
Just because someone’s name is on the title deed (the legal ownership) does not necessarily mean they are the beneficial owner. If the land has been included on the balance sheet of the farming partnership, then someone could argue that this is an indicator (amongst others) of the property belonging to the partnership.
The lack of clarity within partnerships is often not helped by the absence of a formal written partnership agreement meaning there can be an implied terms.
It maybe that there is a field that is shown as partnership property but that an individual partner considers it to be in their personal ownership. The property, the field in this example, could be partnership property but the capital profit sharing ratio may be 100% to the individual partner meaning that if the field were ever sold the individual partner would be entitled to 100% of the proceeds from the sale. The actual ownership is crucial when considering Wills and where assets are passed on death. A partnership agreement trumps a Will. Unfortunately this can lead to assets not making their way to the intended recipient following the death of a partner. Everything is possible but it is important that ownership is clear in the partnership accounts, ideally included in a well drafted partnership agreement, and everyone understands the ownership so Wills, the accounts and the partnership agreement can correctly reflect the intentions.
Although the Partnership Act 1890 governs partnerships which have no formal agreement and states that profits will be split equally, regardless of the time, effort and capital investment, this may not always be the case. Should you have repeatedly given 80% profit to ‘son’ and 10% to both mum and dad this could become implied normal going forward. Partnership profit sharing can be flexed in line with the work of individuals or to assist with tax planning. Farming partnerships function by profits being retained, increasing individual partners’ current accounts. Personal drawings are made from the current accounts by the partners to cover their living costs or spend as they wish. All profit-sharing allocations together with personal drawings can be seen within the current accounts of the partnership and are often displayed towards the back of the financial accounts. Within farming partnership accounts there is often only one current and general capital account and by retaining profits the capital of the partnership can become impacted.
OFTEN MISUNDERSTOOD BUSINESS ASSETS = £1.2M (CAPITAL IN THE BUSINESS)
FATHER 1/3 OWNER
MOTHER 1/3 OWNER
SON 1/3 OWNER
FATHER
MOTHER
SON
TOTAL
£000’s
£000’s
£000’s
£000’s
400
400
400
1,200
10
10
80
100
Personal drawings
(10)
(10)
(10)
(30)
Capital carried forward
400
400
470
1,270
Capital carried forward after 20 years
400
400
1,800
2,600
Capital of the farm £100k annual profit split 10:10:80
So, does son now own 70% of the farm as his capital, £1.8M of the £2.6M total? Or is the farm still owned 1/3 each? This will depend on how the asset ownership and partnership agreement is documented. Such situations are easily avoided through investing in a formal partnership agreement and ensuring this is supported in the financial accounts. Clear ownership is of increasing importance due to the rising value of agricultural land and property. These values have meant that disputes are more common.
KATE BELL Farms & Estates Team kate.bell@albertgoodman.co.uk
BROKEN PROMISES At the last election the Conservatives promised to not raise certain taxes, one of which was national insurance (NI). At the beginning of September, the government went against this and increased NI for the 2022/23 year by 1.25 percentage points and going forward are bringing in a Health and Social Care levy of the same amount. At the same time the dividend tax rates and therefore, the charge to loans from close companies, has also increased by 1.25 percentage points. All of the proceeds from these taxes will be ringfenced for health and social care costs. The increase for NI will affect Class1, 1A and 1B, and Class 4. Class 2. Class 3 NI will not be affected. Therefore, employees and employers will be affected by this with an increased cost for the employer and employees receiving slightly less. Also, the cost of P11D benefits in kind will increase for employers. Partners and sole traders will also pay more, including Class 4 NI. While averaging could minimise any Class 4 NI liabilities, this will only last for a few years until all profits will be taxed at the higher rates. From the 2023/24 tax year, the NI levels will revert to normal levels and a Heath and Social care Levy of 1.25% will be chargeable. From this point the age limit for NI will disappear, meaning all employees will pay the levy with no age limit. Therefore, the older generation of farmers who still receive a share of profits will have an increase in their tax liabilities. It should be noted that trading losses can reduce the chargeable amount. With the increase in dividend tax, it may become less favourable to extract funds from a company via a dividend. Therefore, other options to withdraw funds should be looked at. For some farms, where the land has been retained outside of the company, or the company owes the directors money this is possible. Where this is the case, the company can pay a rent, or interest on a loan from the directors, which would be tax deductible in the company. The individuals would then be taxed on this income. The below table sets out various options. In each case, the director wants £50,000 out of the company, which makes £100,000 profits. This is for the 2023/24 tax year when corporation taxes increase to 25%. In each case the salary is £9,500, interest is £20,000, rent is £10,000 and dividends make up the balance. I have also compared receiving a salary of £39,500 and the balance as dividends.
SALARY AND DIVIDENDS
SALARY, INTEREST AND DIVIDENDS
SALARY, RENT, INTEREST AND DIVIDENDS
SALARY, RENT AND DIVIDENDS
HIGH SALARY AND LOW DIVIDENDS
Personal tax
£3,106
£3,819
£5,944
£3,894
£10,119
Taxes paid by company
£20,311
£15,011
£12,361
£17,661
£15,680
Total tax
£23,417
£18,830
£18,305
£21,555
£25,799
While the extra dividend tax and Levy is not a significant rise in taxes, it reminds us that remuneration is no longer as straight forward as it used to be. The government are taxing employment and if it is possible to switch to other forms of remuneration, this can save substantial sums of tax. Where there are more directors, the savings can be even greater.
ANDREW WITHERS
If you think you could benefit from the above savings, or are concerned about paying more tax, please get in touch.
Farms & Estates Team andrew.withers@albertgoodman.co.uk
HOW TO DEAL WITH THE LABOUR SHORTAGES Following Brexit and the coronavirus crisis we have seen lots of sectors facing shortages of labour. Agriculture has been no different. Our clients have seen the impact of labour shortages with some having to change their farming practices and others questioning their future. It is important for businesses to consider how they can retain their existing staff and attract new staff to supply their needs. The following are things that have been important to other sectors such as accountancy for keeping and attracting staff. PAY YOUR EMPLOYEES THEIR WORTH With labour in high demand, it is important that you pay your staff their worth otherwise someone else will. Therefore, as employers you should be reviewing your staff’s pay now and looking after your current employees.
EMPLOYEE BENEFIT PACKAGES These benefits are extra incentives provided by employers, in addition to a worker’s normal salary. This might include: Life assurance/death in service cover Private medical insurance Occupational sick pay Increased holiday days Pension Good quality accommodation The above is just a few examples of some of the benefits which could be offered. Setting your package apart from the competition is important, not just to recruit staff, but also to retain staff.
FLEXIBILITY WITH WORKING HOURS This of course is difficult with agriculture. Younger generations seem less and less keen to work weekends or unsociable hours. A way to combat this issue could be to consider alternative working patterns such as “four days on, four days off”.
TOM STONE Farms & Estates Team tom.stone@albertgoodman.co.uk
Time to
build
With ever increasing demand for new housing, more and more farmers are selling farmland for development. For many farmers the farm has been in the family for generations and the base cost could be minimal, particularly if based on the values in 1982. Therefore, any sale of land could lead to substantial tax liabilities. In some cases, land is sold with a gain of £200k per acre, on 50 acres the gain could be around £10 million. In the recent past, that would not have caused too high a tax liability, due to the lifetime limit for Entrepreneurs Relief being £10 million. However, with the change in the rules to business asset disposal relief and a reduction in the lifetime allowance to £1 million, this has increased the tax liability significantly. Based on the example above, previously the capital gains tax (CGT) liability would have been £1 million, it would now be £1.9 million. There are ways in which this liability can be reduced, depending on what you want to do with the proceeds. Should you decide to buy more farms, then spending £10 million on new farms, or other qualifying assets means you can pay no tax at the time. You effectively defer the CGT until the new asset is sold. However, should you choose to diversify and want to invest in property, or other assets to generate income, you cannot do this. There is a mechanism by way there could be no tax liability on the sale of the land. If there is an intention to invest the sale proceeds to provide an income for the owners and their family, fully incorporating the business ahead of a sale can mean no CGT is payable. If you do this, all assets pass to a company at open market value, therefore, when the land is sold by the company, there is no gain. This option does not work if you wish to spend the money on a nice house, cars or holidays, due to the
tax cost of taking the money out of the company. However, if the proceeds were to be used to buy investment property or share portfolios, the profits can then be distributed to family members in the normal way. Care needs to be taken when shares are gifted to other family members or sold, as the base cost of the shares will be minimal. Further, depending on what the company does, there could be no IHT relief on the whole value of the company. If you do have development land to sell and wish to have a company to provide wealth for your family in the future, this can be a great way in which to do this, saving a lot of tax. If you are thinking of selling some development land and would like advice in relation to the tax liabilities, please contact us.
ANDREW WITHERS Farms & Estates Team andrew.withers@albertgoodman.co.uk
BPS - THE END IS IN SIGHT, BUT HELP IS AVAILABLE For so many farming businesses the same question is being discussed time and time again - what could replace the lost Basic Payment Scheme (BPS) income? There is not, and should not, be a ‘one approach fits all’ answer to this complex question. The levels of BPS received vary enormously, as do the individual businesses that claim it. The answer should be a considered one, tailored to the family and business in question and will depend on the assets the business holds. Assets can be land and property, but they can also include the location, skills of the team, the drive and knowhow of the team and, of course, the existing trade itself. Although we have been working with our clients to consider the opportunities available there is further support available. Support to help farmers and land managers navigate through the transition in the form of The Future Farming Resilience Fund which launched last month. The £10.7million of funding is to help those that currently receive BPS to understand the changes and identify the best ways of adapting to them. This funding has been awarded to 19 organisations, many of which are local and well known, to provide the free business reviews. This phase of support is available from August 2021 to March 2022. Please see the The Future Farming Resilience Fund: access free support - Future Farming (blog.gov.uk) for more information. Contact the organisations directly to secure the support.
KATE BELL Farms & Estates Team kate.bell@albertgoodman.co.uk
LIFE AFTER THE BASIC PAYMENT SCHEME Basic Payment Scheme (BPS) is being phased out so that by the year 2027 it will not be paid, as it currently stands for farmers in England. There will be different subsidies available but overall, the cash available will be much lower, with some sectors being worst hit than others. For example, a dairy farm producing 2M litres of milk a year, receiving £30,000 of BPS, this will equate to a loss of 1.5 pence per litre per year; an arable farm of 500 acres producing 1,500 tonnes of crops and receiving £45,000 of BPS equates to losing £30 per tonne per year and a beef and sheep farm selling 1,000 lambs and 60 stores a year, receiving £40,000 of BPS, could equate to a reduction of £28 per lamb and £200 per beef animal per year.
Hopefully the new Environmental Land Management Scheme (ELMS) will fill some of this gap but there will be less in total to go around; so what can you do about it? Monitor your costs and benchmark your business against industry standards. Are there ways to reduce costs without sacrificing productivity or profits? Look at reducing your annual outgoings, such as debt repayment, hire purchases and capital expenditure. Could you hire machinery rather than buying it or use a contractor? Machinery sharing with a group of farmers or share farming might also be beneficial. Can you increase output or maximise your income from what you do? Could you change your calving pattern to improve the price for your milk, or would moving lambing increase your returns or can arable crops be established cheaper without reducing your yield? Can you diversify to bring in cash from other enterprises? What would suit your business? What will the initial costs be and what would the payback period be? Find out what grants and other subsidies might be available to you, this might include speaking to an agricultural consultant who will know what is available and advise you accordingly. There will no one size fits all approach on how to replace your BPS but if you can manage your business as best you can, then you will be a better place to adapt to survive and hopefully thrive. We are here to help and challenge investment proposals to make sure they are the right fit for you. Budgeting is important and can help you ensure you make the right decision for the future of your business.
JAMES BRYANT Farms & Estates Team james.bryant@albertgoodman.co.uk
MAKING THE MOST OF
YOUR CASH SAVINGS In a low interest rate market, it can be difficult for savers to get excited about the prospect of managing cash savings. However, cash is a vitally important asset for both short term liquidity and meeting future liabilities. Ensuring your cash is working hard for you, often involves the management of multiple cash deposits and constant review of the bank interest rates. This can be a timeconsuming and painful process. Business owners, charities and individuals often don’t have the time to manage their cash to gain a small advantage. Historically, the administration of multiple cash accounts has been very time-heavy and as such, not a reasonable return on investment. To help address these challenges, Albert Goodman Chartered Financial Planners have partnered with a leading cash management service provider, Insignis Cash Solutions.
exclusive, market-leading savings rates. Insignis is available to Businesses, Charities, Trusts and Individuals so caters for all possibilities.
HOW DOES IT WORK? For clients wanting to benefit from this service, they simply register through an online portal and create an account. The desired amount of savings is then transferred into a main bank account through the platform (also known as a hub account) before being spread across a number of different banks. This process is completed online, and clients can switch funds between accounts with ease. Insignis manages the complex administration on your behalf, providing you with a hassle-free service that enables you to access the best interest on your accounts through one place.
Insignis offers a single sign-up service that gives you access to up to 29 banks and building societies offering
THE GRAPHIC BELOW HIGHLIGHTS HOW THE PROCESS WORKS IN MORE DETAIL: BANK 3 BANK 2
BANK 1
BANK 4
HUB ACCOUNT HELD WITH BARCLAYS
SINGLE CLIENT ONBOARDING PROCESS
CLIENT BANK ACCOUNT
BANK 5
WHAT ARE THE BENEFITS? One-Time Sign-Up & management process – By signing up to an Insignis Cash solution, you are accessing a wide range of bank accounts through one place, rather than having multiple different banking apps or paper statements. This leads to a huge time saving, freeing your time up to focus on what is important. Top interest Rates – Insignis presents the top interest rates across all savings account on a daily basis to ensure that clients are receiving the best rates. In addition, the smaller ‘challenger’ banks in the market at the moment. They have rapid growth objectives and as a consequence often offer better returns than the traditional high street names to attract deposits. Multiple Term Options – The solution offers a variety of term options to keep your funds as liquid as possible. You can hold different accounts with different terms to ensure that you meet your cashflow and liquidity requirements at the right time. Full FSCS Protection – The solution benefits from the Government-backed FSCS protection eligibility of up to £85,000 per individual for each account opened. The solution has the ability to split larger sums of money across accounts to ensure this FSCS protection remains in force. Cash Moved Securely – Cash is moved securely within the UK banking system and you remain the beneficial owner of your money. This is key to ensuring that you funds are protected at all times.
SUMMARY Insignis offers hassle free, active management of your cash deposits to improve the potential returns on your money. Opening multiple bank accounts to benefit from ever-changing rates is too time-consuming. With a single Insignis account, you gain access to the whole savings market through one, easy to use platform. Whether you are an individual, company, charity, trust, or local authority, Insignis can help manage your cash in a more secure and efficient manner. If you would like to discuss the Insignis Cash solution with one of our advisers, please get in touch and we will be happy to discuss this in more detail.
CALUM BUTT DIP PFS Financial Planning Team calum.butt@albertgoodman.co.uk
HOLIDAY LETS THE REDUCED RATE OF VAT AND BOOKING AGENTS There are a number of current issues that may impact businesses providing holiday accommodation.
TEMPORARY REDUCED RATE The temporary reduced rate of VAT for supplies of holiday accommodation increased from 5% to 12.5% on 1 October 2021. Even if a holiday is taken after 1 October the 5% could still have been applied if a tax point was created beforehand. Receipt of payment or issuing a VAT invoice both create tax points, so if a payment is received in September 2021 the 5% reduced rate will still apply to that payment, but not to a balancing payment received after 30 September. Encouraging holiday makers to pay early, possibly by offering a small discount could be of mutual benefit. As an example, if £1,000 was received after 1 October, while the VAT rate is 12.5%, a business would pay VAT of £111.11 to HMRC and retain £888.88 itself. If a 5% discount was offered on payments made before 1 October the VAT payable on £950 would be £45.23 meaning a business would retain £904.77. Not only is more money retained but payment is received early. The saving is even greater if the payment was due to be made and the holiday taken after 31 March 2022 when the VAT rate is due to be back at 20%. Issuing a VAT invoice for the whole holiday value before 1 April 2022 would fix the VAT rate at 12.5% for the entire price invoiced. However the VAT value invoiced would have to be paid based on the invoice date, regardless of whether payment had been received, and there would be additional administration so this may be a less attractive option. It is also worth remembering if a deposit was paid before 15 July 2020, and VAT was paid to HMRC at 20%, but the holiday takes place when a lower rate of VAT is in force the VAT paid can be adjusted to the lower rate. If a VAT invoice is issued showing VAT at 20% a credit note will be issued. It is not too late to make an adjustment if you have not already done so.
PAYMENTS RECEIVED THROUGH AGENTS Where booking agents are used receipt of payment by the agent is usually treated as receipt of payment by the property owner. This means receipt by the agent is the important date for determining when whether a payment has been received when the 5%, 12.5% or 20% VAT rates apply. Property owners should also be accounting for VAT when payments are received by their agent. This is the case even if the property owner accounts for VAT on a Cash Accounting basis. The HMRC Cash Accounting Notice includes a paragraph, that has the force of law, which states “If an agent collects payments on your behalf, you must account for VAT on the supply in the VAT period in which your agent collects payment from your customer”. If the booking agent collects payments under a stakeholder arrangement where they hold the payment temporarily this may not create a tax point. In general we would not expect booking agents to be acting as stakeholders.
IMPLICATIONS OF USING AN OVERSEAS BOOKING AGENT Many holiday letting businesses have an income from holiday lettings which are below the VAT registration limit, currently £85,000, so are not VAT registered. What is not widely appreciated is that if a UK business receives certain services from businesses based overseas, with no UK VAT registration, the value of these overseas services has to be added to the turnover of the UK business when deciding if the UK business has to register for VAT. This is called the reverse charge mechanism and the services covered include advertising and booking services. One large overseas booking agent charges a commission of 15% which means if a business received holiday bookings of £80,000 through that agent the commission would be £12,000 and the aggregate of £92,000 would be well over the VAT registration limit. HMRC have obtained information from at least one overseas agent and we are aware of registration checks being undertaken on businesses who have a turnover from holiday lettings of under £85,000. When using agents it is important to be clear in what capacity they are acting and the VAT implications this may have. If you would like more advice on any of these issues or any other VAT related matters, please get in touch with your usual contact your usual AG contact or email enquiries@albertgoodman.co.uk
RICHARD TAYLOR VAT Team richard.taylor@albertgoodman.co.uk
Tax free compensation for leaving a tenancy To terminate an Agricultural Holdings Act (AHA) tenancy, a landlord can serve a notice to quit under s25 of the AHA 1986 Act. If the tenant is unwilling to accept the notice to quit, the tenant can serve a counter-notice which then refers the notice to Tribunal. The Tribunal would then need to consent to the notice before it can be treated as valid.
AGRICULTURAL HOLDINGS ACT 1986 SECTION 60 TAX FREE COMPENSATION Where a valid notice has been served by the Landlord under either of these situations, the tenant will be entitled to compensation. Section 60 of the Agricultural Holdings Act legislation outlines the tax-free compensation. This is made up of both a basic and additional compensation element. There are two variations of the basic compensation, which is either one year or two years rent, as set out in section 60(3) parts (a) and (b). To qualify for part (b), which would be two years compensation, you do need to prove that your loss as a tenant was two years rent or more. Section 60(4) states that the amount of additional compensation shall be an amount equal to four years’ rent holding. This could therefore provide compensation up to six years rent capital gains tax free. So, a farmer paying £30,000 per year of rent could have up to £180,000 of tenant’s compensation tax free.
Care needs to be taken with the timing of any compensation received as this could jeopardise the taxfree position.
TENANT IMPROVEMENTS When you exit a tenancy, it is also important to look at the cost of any buildings which you have erected or any improvements that you have made as tenant, as these would be deductible from the taxable compensation in arriving at the chargeable capital gain. In addition, if the tenancy was in place before 31 March 1982 then the tenancy could have a base cost (being
a March 82 valuation), which could be set against the taxable compensation.
APPORTIONMENT OF TENANT’S COMPENSATION The compensation would then be apportioned between the assets on the farm. These might consist of say a farmhouse, let cottages and farm buildings. For capital gains tax purposes, these assets could be subject to different tax rates and, where available, capital gains tax reliefs. For instance, if you have lived in the farmhouse for as long as you have been a tenant on the farm, the farmhouse should qualify for principal private residence relief for capital gains tax purposes, which would mean no tax is payable on any compensation allocated to the farmhouse. Any capital gains tax on the cottages would be chargeable at a rate of 18% or 28%, depending on your level of income, with residential properties being subject to these higher rates of capital gains tax. Compensation allocated to the land and buildings would either be chargeable at 10% or 20%, depending on both your level of income and whether Business Asset Disposal Relief (BADR) applied. Depending on your circumstances, other reliefs, such as rollover relief - which enables you to defer the gain might also be available. As you can see, the apportionment and the timing of tenant’s compensation can change the tax position considerably. With thought and imagination, we can assist you to make the most of these allowances.
KATE HARDY Farms & Estates Team kate.hardy@albertgoodman.co.uk
CHANGE TO HOW YOU CALCULATE YOUR TAX LIABILITY Since the introduction of self-assessment in 1996, income tax has been based on the accounting period of a business. Each business could choose the date to which they drew up their accounts. While for many businesses 31 March or 5 April seemed fine, this was not the case for all businesses.
As you can see in this example, where profits have increased, if the basis periods did not change, the individual would remain a basic rate taxpayer. However, if the proposed changes are brought in, taxing on the tax year instead of the accounting year, there would be tax due at the higher rate of tax.
Many farmers have chosen to have a year end that ties in with their farming, whether that is a September year end, after harvest, or a December year end to tie in with bulk calving in the spring.
While there could be some mitigation in reducing the tax liability, with HMRC suggesting spreading the increased profits over five years, this could still lead to more tax.
While this has given the added benefit of giving more time to assess income tax liabilities, it has also given rise to different calculations to tax in the first and last years of trade.
For some farmers, five-year averaging may be available, however, while this could keep individuals as basic rate taxpayers, it would still increase tax liabilities and worsen cashflows as payments on account would also likely increase.
HMRC now deem this to be unfair and complicated. HMRC are proposing to change the way in which tax is calculated. HMRC did listen to various professional bodies and have delayed the change. The changes were originally from 1 April 2022, and this will now be delayed a year. Under the new rules the tax will be calculated on a tax year basis and not an accounting year. For those businesses with a 31 March of 5 April year end, there will be no difference in the tax liabilities. However, for businesses with a different year end, this could lead to substantial tax rises. This is due to being taxed from your last accounting date to 31 March/ 5 April in one year. For example, if you had an April year end, your tax return for 2022/23 would be based on the profits to 30 April 2022. In 2023/24 you would be taxed on the profits from 1 May 2022 through to 31 March 2024. This is 23 months of profit. While doing this, you will be able to relieve any overlap profits. It is often the case that profits increase over time and when a business starts, the profits are not so high. Looking at the above example with some figures, say in the first year of trade the profits were £24,000, however the business has now grown and is now making £48,000 profits each year. The business would have overlap profits of approximately £22,000. In the final period of trade, it would be taxed on approximately £70,000 of profits, after the relief of £22,000.
If businesses with an accounting year end other than 5 April or 31 March continue with their alternative year end one would be required to estimate their profits for the tax year each year, unless a second set account are drawn up to the tax year. Where this happens, the effect for 2023/24 is the same, however, going forward profits would have to be time apportioned to the tax year. Therefore, if you have a December year end, profits will have to be estimated from 1 January to 31 March of each year to complete the tax return. Once figures are finalised, amended returns will need to be submitted. This could give some scope to reduce the larger profits in 2023/24. All of this is under consultation with HMRC now and no final policies have been confirmed. However, it is likely to happen and there is very little time to plan for this. While there is no definite issue yet, if you are a profitable business with a non-31 March/5 April year end, you may want to consider planning cash flow, or other opportunities to mitigate your tax liabilities. If this is something you are concerned about, please contact us.
ANDREW WITHERS Farms & Estates Team andrew.withers@albertgoodman.co.uk
pension CONTRIBUTIONS FROM YOUR LIMITED COMPANY
Pension planning can sometimes feel like a scary subject as historically pensions have been extremely complex. However, since pension simplification in 2006, many of the historic complications have been removed and pensions are a much more attractive investment for all, but particularly for directors of limited companies. As a director, paying pension contributions directly from your limited company is an extremely tax efficient way for you to extract profit from your business. Your limited company can contribute pre-taxed company income to your pension, and because an employer contribution counts as an allowable business expense, your company receives tax relief against corporation tax. This means that the company is saving 19% corporation tax on each pension contribution and there is no personal tax liability on the individual director. In addition, whilst the funds remain invested within the pension, any growth on the funds is free from any taxation. This makes the overall strategy extremely tax efficient and builds wealth for the director in a personal capacity outside of the business.
How much can an employer pay into a pension? The level of contributions an employer can make to registered pension schemes for its employees is effectively unlimited. However, there are a number of different factors that can affect the tax relief given.
Annual allowance In order to be fully tax efficient, employer contributions are limited to the director’s annual allowance. The annual allowance is the total amount that can normally be paid,
by an individual, their employer and any third party into their pension in a tax year without facing a tax charge. The standard annual allowance is currently £40,000 per tax year. However, some high earners have a reduced allowance due to ‘tapering’ - possibly as low as £4,000. This tapering could apply where an individual’s income is more than £200,000 for the tax year. In addition, if the annual allowance hasn’t been fully used in any of the previous three tax years, it may be possible to ‘carry forward’ the unused allowance. Including the current tax year, that could mean you’re able to make a pension contribution of up to £160,000 including tax relief. Based on the current corporation tax rate, this could result in a corporation tax saving for the company of £30,400.
The ‘Wholly and Exclusively’ Test Whilst the annual allowance sets the maximum tax efficient limits, employer contributions may not automatically qualify for tax relief as it is at the discretion of the local Inspector of Taxes. If the contributions are ‘wholly and exclusively for the purposes of the business’, tax relief will be given. HMRC guidance makes it clear that pension contributions will normally pass the wholly and exclusively rules. In addition, as controlling directors are able to decide how they are remunerated, HMRC’s guidance is even more positive stating that “it is unlikely that there will be a non-business purpose for the level of remuneration package”. This gives us the confidence that employer contributions on behalf of directors will benefit from the tax relief.
Case Study Mr and Mrs X, both 45, own a profitable business ABC Ltd that looks set to achieve profits of £300K by its 2021 year end in November. If they were to take no action, this would equate to a corporation tax bill of £57,000 based on the main rate for the 2021/22 tax year.
Objective: Mr & Mrs X were looking for ways to legitimately reduce the business’ corporation tax liability and extract profit in a tax efficient manner in a personal capacity.
Solution: To help to reduce corporation tax within a business, we recommended that they make employer pension contributions into their existing personal pensions. We were able to establish that both clients had £46,000 of unused pension allowance from the previous three tax years, so the total amount that each director could contribute in the current tax year was £86,000. As a result, the couple have each made £86,000 employer funded pension contributions before their company’s trading year end in November 2021, reducing their business’ profit by £172,000 - and therefore corporation tax by £32,680. In addition, they have been able to increase their personal pension savings that they plan to supplement their income with in retirement. Albert Goodman also provided advice on the investment of these pension funds into a suitable, low cost risk adjusted investment portfolio.
Summary For directors of limited companies who have plenty of profits in their business, company pension contributions can be a tax efficient way to extract profits and save for your future. However, you also have to bear in mind that you won’t be able to access your pension until later in life (currently age 55 – rising to 57 in April 2028 unless you have a pension with a protected pension age). If you would like to discuss your existing investment or pension portfolio with one of our advisers, please get in touch and we will be happy to discuss this in more detail.
CALUM BUTT DIP PFS Financial Planning Team calum.butt@albertgoodman.co.uk
A PROMISE UNFULFILLED “One day son, all this will be yours!” maybe a tired, stereotypical (and probably outdated) phrase stated by a farming father to his son coming of age, standing on a hill overlooking his vast empire as the sun sets; but one which nonetheless may emphasize the family nature of farming and the lineage. An old adage is that you don’t own the farm, you’re just looking after it for the next generation like some family heirloom. It is not an exaggeration to call the farm the family silver. But what if son stays on the farm, in anticipation of his inheriting it, but dad subsequently decides to do what Harold Macmillan criticized Margaret Thatcher for doing and starts selling off that family silver? Or, more likely, leaves it in his Will to someone other than his son. The problem is that dad’s earlier promise, on its own, isn’t worth the paper it is written on. If dad were to die and leave the farm to his other children, or even the cats’ home, he is entirely within his rights to do so as far the law is concerned. We have testamentary freedom in the UK, and provided all the formalities are met and one’s faculties are in order you can leave what you like to whom you like upon death; we do not have forced heirship unlike in some European countries.
What remedy would son have in this case? Assuming the Will is in order there would be few options as far as the law is concerned. Any promise can be enforceable even if it’s verbal (though this can be hard to prove, especially if dad is dead) if consideration is given by son in this case e.g. acting to his detriment as a result of that promise or made some other sacrifices elsewhere. All these are the ingredients to make an enforceable contract in English law. However, another ingredient of that is for there to be an intention to create a legal relationship – and a court would be unlikely to enforce this between father and son. The only option left to son is the law of equity. The concept of remedying the situation of someone going back on a promise, upon which someone has relied to their detriment, is nothing particularly new, but the phrase “proprietary estoppel” to name the principle to combat it, is relatively modern. Lord Denning, the man who could turn dry legal terminology into near poetic prose gave a summary of proprietary estoppel in Crabb v. Arun DC (1976):
“It seeks to prevent a person from insisting on his strict legal rights... when it would be inequitable for him to do so having regard to the dealings which have taken place between the parties”
This is what son would rely upon to wrestle his inheritance (or part of it) back from the legatee. He would needed to have relied on his father’s clear and identifiable promise (proving that alone might be an issue in face of a dispute!). If he was going to stay on the farm anyway even without father’s assurance, he would have no claim – there would be no causative link between the promise in question and his subsequent actions. In reliance on father’s promise son would also need to suffer detriment of some sort – either in terms of actual cost, but also in terms of other things foregone. Son might have had an offer at a place at Harper Adams or Reading which he turned down to stay on the farm and build up his inheritance; he might even have had a training contract at Albert Goodman lined up! He would have arguably given up wider opportunities as a direct result of relying on his father’s promise. To right this wrong, the courts could impose an ‘implied’ trust onto the actual legatee for the beneficial ownership of son. However, as stated above the equity courts can do whatever they think fit to remedy the situation – a cash payment representing son’s efforts and/or expected inheritance may be suitable. Such a situation happened concerning a farm near Yeovil in 2018.
not make a claim, despite her working on the farm for 30 years prior. However, in 2018 the High Court held that all the ingredients for a proprietary estoppel claim were in place for Lucy. An award of £1.17million was deemed the most suitable remedy and was awarded to her as the cost required to re-open the dairy unit and get her farming again. The Court of Appeal upheld this judgment in spring 2019. Whilst farming is a family business and most of time it is without dispute and successions may be seamless, sometimes blood is not thicker than water. Death and vast fortunes do not always go well together and misunderstandings in life can make a difficult time even worse upon death. The lesson here would seem to be: clarity, proper lifetime retirement and succession planning and having everything in the open – and in writing!!
The case of Habberfield v Habberfield concerned not son, but younger daughter, Lucy. Lucy claimed that father had promised her the dairy unit of the farm upon his retirement. Upon his death, he left the farm to his wife who then closed the dairy unit down. The wife had claimed that because of a family dispute, which caused Lucy to leave the farm just before father died, Lucy could
CHRIS THORPE Tax Team chris.thorpe@albertgoodman.co.uk
Selling your land for housing development - VAT considerations STEVE CHAMBERLAIN VAT Team steve.chamberlain@albertgoodman.co.uk
VAT is one of several taxes that need to be considered when selling development land. It is important that you take early advice, and that all necessary steps are carefully implemented.
Opting to tax, so that the land sale is subject to VAT, should allow recovery of input VAT. However as ever it is important that the invoices supporting claims for VAT recovery are correctly addressed and drawn up.
Your advisors need to liaise closely, as any change to the structure or timing of the deal needs to be reflected in the VAT implementation.
Note that certain purchasers cannot be charged VAT, even if there is a valid Option to Tax. For bare land, this is normally limited to: -
The key considerations are outlined in this article.
Housing Associations, or DIY builders, for residential development; or
VAT treatment of land sales The first issue is whether the seller is already obliged to charge VAT or has the flexibility to choose whether VAT could be charged. The sale of bare land is normally exempt from VAT, unless the vendor has notified HMRC of a valid “Option to Tax” over the land. A key step in any transaction is to identify whether the vendor has ALREADY Opted to Tax the land being sold. There are other instances where the sale of unopted land could be subject to VAT, for example the freehold sale of land with (non-residential) buildings or civil engineering works, unless they were completed more than 3 years ago.
Why would a vendor wish to charge VAT? To reclaim VAT on related costs. If the sale is VAT exempt, the vendor is not, in principle, entitled to reclaim VAT on the costs of marketing, improving, or selling the land, (unless the VAT involved is relatively small - “de minimis”.) If significant sums have been spent obtaining planning permission or a promotion fee is payable the VAT at stake could be substantial.
parties connected with; or who have provided finance to; the vendor, where certain conditions are met. Finally, if the vendor paid VAT on the purchase of the land, or on a subsequent development on the land, within the last 10 years or so, it may need to consider whether any of that VAT is repayable to HMRC in the event it makes a sale that is exempt from VAT.
Does charging VAT cause any issues for the purchaser or vendor? If the purchaser is constructing new homes for sale (rather than letting) it will usually be able to recover VAT charged, although being charged VAT will impact on its cashflow. The contract should of course state that VAT is payable in addition to the agreed price. If the sale is subject to VAT, the purchaser will normally suffer an increased SDLT charge, because SDLT is paid on the VAT-inclusive consideration. A seller being charged VAT may therefore wish to negotiate over the price. An Option to Tax normally binds the person making it for at least 20 years. If the intended transaction is aborted, the Option to Tax will thus normally be in
effect for any future transaction. After 20 years, it may be possible to revoke the Option to Tax. On a practical point, your advisors may not always keep old files for more than 10 years, so it is important that you retain your own copies of Options to Tax correspondence in a safe and accessible place. This point also needs to be borne in mind if an overage payment, or a payment for agreeing to lift a restrictive covenant, is received at a later stage in relation to Opted land.
What if a vendor is not registered for VAT, but wants to charge VAT on the sale?
How simple is the process? Care needs to be taken to get the detail right. The timing of the Option is important, and it is also important that the land being Opted is clearly identified. If the landowner has previously received VAT exempt income from the land, (e.g. rent; or if it has previously granted an option to purchase the land) this must be disclosed on the Notification to HMRC. In some cases, HMRC’s prior permission to Opt to Tax is required. This can cause extreme delay; see next section.
The vendor(s) must register for VAT, and formally notify HMRC of an Option to Tax. Where the land is owned jointly, and/or legal title is held by a trustee, care is necessary to identify the correct “person” who should be registered for VAT and making the Option to Tax.
A current issue is that the purchaser will typically want to see a written acknowledgement from HMRC accepting the vendor’s Option to Tax. At the time of writing, HMRC is quoting a turnaround time of 120 WORKING DAYS to provide this. Other correspondence is also suffering extended delays.
Clearly, this should reflect any changes made to the legal or beneficial ownership of the land prior to sale, e.g. for Capital Taxes planning. It is important that your various advisors liaise closely.
This point can usually be managed if your advisors carefully document what has been sent to HMRC and prove that it has been received by HMRC.
It is also important that invoices and Letters of Engagement from your advisors are correctly addressed to permit reclaims of VAT on deal fees. A key point to bear in mind is that a VAT registration covers all activities of that “person”. A “person” could be a partnership, a company, or an individual (among others.) HMRC’s practice is to treat joint owners AS IF they were a partnership for VAT registration purposes.
Conclusion There can be large sums involved with land transactions, and it is important that the VAT position is carefully considered, and any required actions are undertaken diligently and timeously. Your advisory team needs to work together and communicate effectively.
XERO TOP TIPS TRACKING CATEGORIES As many farms and estates have multiple enterprises or have diversified into non-farming activities within their current business one feature of Xero may be helpful when it comes to understanding the profit/ loss position of these various ventures. Tracking Categories will allow you to analyse income and expenditure without the need to have lots of additional codes (e.g. having a repairs code for each enterprise or for each rental property). By using Tracking Categories this allows costs to be shown as a consolidated figure in your annual accounts whilst also being able to break these figures downs between different enterprises or properties. 1. Tracking Categories can be found under “Accounting” and “Advanced Accounting”. You can have 2 Tracking Categories however you can have up to 100 Tracking Options, as sub-categories within each of these. 2. By clicking “Add Tracking Category” you can add in the overall Tracking Category name. In the case below I have used ‘Enterprise’. Then add in the different options you require. In the example here I have included Dairy, Beef, Sheep, and some Rental properties. As the business in this example has multiple rental properties the second Tracking Category, ‘Rental Property’ has Cottages 1, 2 and Flat 1A as the options.
3. If I therefore have a repair bill for Cottage 1 and Cottage 2 I can raise a Bill as follows which, as you can see, goes to the same repairs code, but I now also have Enterprise and Rental Property as options. These options will also appear on the Reconcile screen next to the VAT rate option
4. This means whenever I code a transaction from the Reconcile screen or generate a bill or invoice, I will have these options available to me and so if you choose to use Tracking Categories you will need to be consistent in selecting them. (Please note that there is the ability to use Find and Re-Code to add your tracking categories to transactions that have previously been reconciled). 5. By using Tracking Categories, you can now select “Rental” as the Enterprise when running a Profit and Loss report to isolate this aspect of the business. The image below shows all tracked transactions for all 3 properties in the year so I have then selected just Cottage 1 in the second image that shows that this property is loss making in the year. You can then clearly see that this was due to extensive repairs in the year. By using Tracking categories this allows for the bigger picture of overall rental profits to be easy to understand and view and then allows the ability to drill down into greater levels of detail for the individual properties.
CHARLIE GREEN Farms & Estates Team charlie.green@albertgoodman.co.uk
Free review of your business finances We have developed a financial tool to help review your business finances and cashflow. This tool will appraise your current finances and indicate whether you can borrow more money in the future. We offer free initial meetings to discuss your business and review your business’s finances. If you would like to know more and how we may be able to assist you and your business, then please do get in touch.
TOM STONE Farms & Estates Team tom.stone@albertgoodman.co.uk 01823 250397
THINK WE COULD HELP? If you are reading this newsletter and are not currently a client of Albert Goodman we would be delighted to come out and visit you, on farm, free of charge.
of knowledge, experience, and technical skills helps build stronger relationships with our clients producing the right results for their businesses to achieve objectives.
Albert Goodman is one of the largest firms in the South West, with a proud history stretching back over 150 years. By placing great emphasis on our client service ethos; we seek to build long-term relationships with our clients. We are able to provide technical expertise in areas such as VAT, tax, financing and financial planning and, as a specialist team of 30, our friendly Farms and Estates team act for over 500 farms and estates. Each member of our team has a background, education, or interest in farming and rural businesses. This relatively unique combination
If you would like to know more about us and how we may be able to assist you and your business going forward, then please get in touch.
KATE BELL Farms & Estates Team kate.bell@albertgoodman.co.uk 01823 250286
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