SINGLE FARM payments are almost certain to be treated as farming income if a farming activity remains on a holding, according to new information from the Inland Revenue.
The news follows a meeting between industry stakeholders and the Inland Revenue this month, and means farmers will notice little difference on an ongoing basis from current arrangements, says Carlton Collister, senior tax manager with chartered accountant Grant Thornton.
But there could be a bunching of income from subsidies for arable farmers in 2005/06, which would increase their tax bills for that year. “There was a chance that the SFP could have been treated as investment income, not arising from trade,” said Mr Collister. “That would have limited the deductions farmers could have made against it, such as some farmhouse expenses. Treating it as farming income is also important for capital gains tax and inheritance tax purposes.”
But there are still some areas of concern. For UK tax purposes, farming means using the land to generate agricultural produce, and the Inland Revenue has no intention of changing the definition of farming for UK tax purposes, said Mr Collister.
This means it is unclear if landowners who only receive payment for keeping the land in good agricultural and environmental condition (GAEC) will be treated as farmers.
For capital gains tax purposes, the SFP would appear to be a capital asset. It will have no base cost, as it was created without direct relation to the existing agricultural subsidies.
Inland Revenue thinking is that the entitlement will come into existence in 2005. “It had been argued that the entitlement came into existence in 2003, as theoretically it has been possible to trade it since ministers ratified the entitlement to make decoupled payments to farmers in October 2003,” said Mr Collister.
“This approach would potentially give business asset taper relief problems, as it could be argued that the entitlement has not been used in the farmer’s trade until 2005 and this would increase the tax payable on a future sale of the entitlement.”
Rollover relief for capital gains tax purposes would not be automatic, said Mr Collister. Assets to which rollover relief applies are listed in the legislation and the government will have to specifically include entitlement to the SFP as such an asset.
“However, the Inland Revenue is aware of the industry’s concern in this area and so it is expected that such inclusion will be forthcoming early in 2005.”