28 July 1995

AI is a taxing problem

The Inland Revenue has completed its investigation into the Nicholsons accounts and the outcome is not encouraging. Tim Relf reports

TAX matters have been top of the agenda at Briscoe this month as the Nicholsons face the possibility of an unexpected bill.

This follows a lengthy Inland Revenue investigation of the farm accounts, which has focused in particular on AI costs and the valuation of young stock.

The Revenue has maintained that the Nicholsons were wrong to offset AI charges as a milk production cost, saying that they should be treated as a breeding cost.

The net result, says Eddie Nicholson, could be an additional tax charge for several thousand pounds, dating back to the late 1980s.

"I have not heard of the Revenue taking this approach to costs before," says Mr Nicholson. The whole investigation could be seen as something of a "test-case" for other dairy farmers.

"The 1988-90 period is the one when most of the potential liability would be due," he adds. "There was a big increase in the number of young stock coming into the herd then as it was two years after we came to the farm and we were building numbers up."

In valuing replacements, the Nicholsons have traditionally used actual rearing costs, rather than the alternative method of basing it on 60% of the market value.

"Had we opted for the alternative, or indeed bought the replacements in, the problems we face now would not have arisen because I would not have needed to account for an AI cost at all," says Mr Nicholson.

In its argument, the Revenue refers to a clause in its guidance notes, Ben 19 (which suggests AI costs should be allocated to the replacement stock), although these only took effect last year.

The Nicholsons sought advice from a tax specialist who maintains that AI costs do not form part of the cost of breeding in the normal sense of the word, as they are primarily incurred in order to produce milk.

But the Revenue has indicated that the matter could end up in the High Court if the Nicholsons were to appeal successfully against its decision.

A fear of the time this would take and the possible costs involved make the Nicholsons reluctant to pursue this course of action, even though they have had offers of support from the NFU.

"The Revenue has, however, indicated that it may not demand an interest charge or penalties on any sum outstanding, so that is one consolation," says Mr Nicholson.

Replacement costs generally have been a "bone of contention" with the Revenue for some time. "Our costs are very low compared to many farms. For example, recent budgets show heifers costing only £246 to bring to two years of age (see table).

"It is possible to calve a Holstein heifer at two-years-old with minimal concentrate use. Once they get to six months old we only feed them grass, silage and minerals."

Meanwhile, two calves have been sold at prices of £110 and £80. A small Angus, reaching £50, was brought back from market. "Values are falling and so we havent sold any more recently," says Mr Nicholson.

Similarly, he is also disappoined with the prices made by the latest batch of beef bulls, which ranged from 115p to 124.5p/kg.

And he points to the tight margin of this enterprise. Last year, were it not for the £60 a head subsidy, the bulls would have only made an average profit of £25 a head.

The beef bulls are the main straw users. And with this years straw prices, margins may be narrowed further, he suggests. "At the moment, round-baled barley straw is making £7.50 a bale, oat straw £5.50, and wheat straw £5.

"Theres not a lot of corn grown in the immediate area, so we tend to have to look further afield if we want to get a good, clean sample.

"To get it form York, which could be the area from where we buy, may add another £2 or £3 a bale in transport costs."

"At least the bulls dont take a lot of time," he points out. Which is probably just as well, as Mr Nicholsons wife, Carol, is expecting her fourth child any day.


&#8226 Total 180ha (444 acres) upland grass on a long-term ley, bordering the North Yorks moors, near Whitby; 133ha (330 acres) tenanted and 46ha (114 acres) owned.

&#8226 Farmed in partnership by father, George, and son, Eddie Nicholson and his wife, Carol.

&#8226 Stocked with dairy herd of about 240 cows, up to 175 young stock; 1.4m litres of milk quota on the farm, another 170,000 litres leased. About 65 male calves kept and finished as barley beef, depending on the calf price at the time. Also 285 Scotch Blackface ewes and 75 followers.


Heifer rearing costs to 24 months

(£)

Purchased

concentrate130

Vet and med12

Miscellaneous 44

Forage60

Total246

George Nicholson checks over some of the dairy herd replacements whose value has been a "bone of contention" with the Inland Revenue for some time. But Briscoes rearing costs are much lower than on many farms.