This month, Farmers Weekly’s experts give advice on product liability insurance, claiming VAT and greening rules.
See also: July’s Business clinic Q&A
Protect your business with the right level of product liability cover
Q I have £5m of products liability included in my farm insurance but my consultant advised raising it to £10m. Is he right?
Farmers & Mercantile
A Products liability cover protects the policyholder from the cost of claims arising where products that he sells from his farm cause injury or illness to a person or persons, or damage to someone else’s property.
It is important to understand that it differs from public liability insurance in that the indemnity limit is per year of insurance rather than per claim.
Products liability claims that we have seen include:
- Milk sold from the farm containing antibiotics and subsequently contaminating a full vat at the dairy
- Hay sold from the farm containing glass and causing injury to a prize racehorse
- Grain containing rat bait contaminating a whole silo at the mill
- Eggs infected with salmonella poisoning consumers
- Livestock sold carrying a disease which is then passed on to other livestock.
These claims are more and more common and increasingly likely to be pursued. Products liability insurance for a farm is usually included alongside your existing public liability insurance with a similar indemnity limit, commonly £5m.
However with claim levels increasing you do need to consider increasing this to £10m, depending on what type of produce you sell but especially if you are supplying retailers or food manufacturers.
It is important to understand your cover and any exclusions or conditions – insurers will only cover your legal liability under the laws of England and Wales and often exclude products sold to America or Canada as the risk of litigation is considered higher.
Also, insurers do not provide cover for any liability that you take on as part of a contract.
For instance, if you are supplying a supermarket or food manufacturer read the terms of the contract very carefully.
Liabilities placed on you as part of that contract may go beyond that provided by normal product liability insurance.
Specialist covers such as product recall (when a retailer has to remove items from its shelves because of a problem caused by your product) or financial loss cover can be provided.
This is where your product causes a financial loss but not physical injury or damage – for example, supplying the wrong variety of grain on a seed contract, resulting in the end user not receiving a milling or malting premium.
These insurances tend to be expensive so the most important point is to understand the terms of your contract, especially what you can be held liable for.
Show a copy of your policy to your insurance broker and ask for a clear explanation of what will be covered by your existing public and products liability cover.
Proper use of VAT exemption rules
Q What input VAT can I claim on expenses where there is an element of private use? Also, I have a rental property that is owned by the farm business but is exempt from VAT. What input VAT am I able to claim on this using the partial exemption rules?
A For most of your expenses, such as electricity, phone bills and farmhouse repairs, you should reclaim the proportion of the VAT that relates to the business use.
For example if you use your mobile phone for 60% business use and 40% private use you should only claim back the 60% of the input VAT on your phone bill that relates to the business use.
When claiming back VAT on fuel and car repairs where there is private use you should consider the following: with fuel there is generally an “all or nothing” rule – you should either claim all the fuel then apply a fuel scale charge (set by HMRC based on emissions) to account for the output VAT on the private element, or not claim back any of the VAT on your fuel.
You are able to claim VAT just on your business fuel but this requires more admin work as you should then keep a log of all your business miles in unincorporated businesses.
For your motor repairs you are able to claim back all the input VAT providing the car has an element of business use and the business has paid for the repairs.
Regarding rented property, VAT inspections often uncover overclaims because the partial exemption rules are misunderstood. Penalties for such offences can be 100% of the tax overclaimed.
When you have an exempt supply on the farm, you can claim the input VAT on the exempt property, as well as inputs directly attributable to taxable supplies (such as livestock sales, although these are zero-rated) so long as the “de-minimis” test criteria are satisfied. This criteria will be checked on an annual basis to make sure the claim still meets the monthly/quarterly limits.
These rules say that as long as the exempt input VAT (on the rented property) is less that 50% of your total input VAT and does not exceed £625/month, you are able to claim back all of your exempt input VAT.
You should take care to ensure you properly apportion your input VAT between any exempt supplies (rental) and the taxable supply (from the farm) and apportion between the two any costs that relate to both supplies – for example professional fees.
You should consider opting for your rental property to be taxable so you can reclaim all the input VAT on your expenses. You will, however, also have to charge VAT on the rental and pay output VAT if you choose to sell the property.
How to establish ditch ownership
Q The boundary of one of my fields has a small bank with a hedge on top and at the foot of this bank, on the far side, there is a ditch running parallel with my hedge.
The ditch needs cleaning out periodically to remove debris and allow excess water to drain off from my land.
Where is my boundary? I am confident the hedge on the bank is on my land but how do I know if I also own the ditch on the other side?
I want to carry out these works to the ditch without asking my neighbour’s permission.
Head of agriculture
A As with any boundary question your first port of call is to retrieve your title deeds and check whether or not the legal boundary in question is identified precisely to determine whether or not the ditch falls within your ownership.
If your land is registered at the Land Registry, you will be able to obtain a plan from the Land Registry containing your registered title.
This may help, but bear in mind that unless the boundary has been determined exactly in accordance with their procedures (and shown on the plan as such), the Land Registry title plan does not precisely identify the exact position of your legal boundary.
It simply indicates a general boundary position and therefore the ownership of the ditch may still be unclear.
If this is the case then you may be able to rely upon what is known as the hedge and ditch presumption.
This presumes how and when the ditch has come into existence to help determine the boundary line.
As with any presumption it can be rebutted by evidence to the contrary. However it may help you to identify the position of your legal boundary line and whether the ditch falls within your ownership.
First, it is presumed that the ditch was dug out after the boundary was established.
Second, it is presumed that the ditch was physically created by the landowner digging out the earth at the very outer perimeter of his own land, throwing the excavated soil on to his own land and creating the bank upon which the hedge would grow. The hedge and ditch are created at the same time and work together.
It would be unusual for a landowner to throw the excavated spoil from his own land on to his neighbour’s land.
The presumption therefore establishes that the legal boundary line lies along the far side of the ditch furthest away from the hedge, which means that you would own the ditch as well as the hedge.
As mentioned above this is a general presumption and can be rebutted if, for example, the ditch is natural rather than man made, or if the legal boundary was specifically created and identified after the hedge and ditch were already in place.
There may also be words used in your title deeds that identify precisely the legal boundary line, which may not necessarily run along the outer edge of the ditch.
The hedge and ditch presumption, though, is a useful guide to clarify the position of the legal boundary line on agricultural land where there is a man-made ditch running alongside a hedge.
Therefore, if there is nothing contrary to the presumption, you may proceed on the basis that you are the owner of the ditch and clean out your ditch.
Q Regarding CAP reform and greening, it is probable that as I have about 32ha arable (55% of my total area) I will need three crops.
If I decide to forego the greening element of the Basic Payment Scheme (BPS) in 2015 and possibly 2016 then can I opt back in in 2017 and receive the full BPS payment once I have rearranged cropping to meet the greening rules?
Head of agribusiness,
A The greening element supplies 30% of the potential payment and is mandatory for those applying for the Basic Payment Scheme.
However, as it stands, failure to meet the greening requirement would not lead to the total loss of the payment as the rules are currently understood.
The reduction in payment for non-compliance on both environmental focus area and crop diversification is based on a formula that calculates the difference between the areas required and the areas achieved.
Based upon this formula, the maximum penalty is effectively 50% of the greening payment over the whole claimed area. From an immediate financial or practical perspective this may appear a bearable cost to incur.
The ability to rearrange your circumstances in 2016 or 2017 would not be impacted.
With regard to implications of adopting this approach, it is expected that additional penalties will be incurred post-2017. Non-compliance will also increase the risk profile and increase the probability of inspections.
Q It is quite probable that as I have about 32ha arable (55% of my total area) I will need three crops.
If I decide to forego the greening element of the Basic Payment System in 2015 and possibly 2016 then can I opt back in 2017 and receive the full SPS payment once I have re-arranged cropping to meet the greening rules?
A The greening element supplies 30% of the potential payment and is mandatory for those applying for the Basic Payment Scheme.
However, as it stands failure to meet the greening requirement would not lead to the total loss of the payment as rules are currently understood.
The reduction in payment for non-compliance on both environmental focus area (EFA) and crop diversification is based upon a formula which calculates the difference between the areas required and the areas achieved.
Based upon this formula the maximum penalty is effectively 50% of the greening payment over the whole claimed area.
From an immediate financial or practical perspective this may appear a bearable cost to incur. The ability to rearrange your circumstances in 2016 or 2017 would not impacted.
With regard to implications of adopting this approach, it is expected that additional penalties will be incurred post 2017. Non-compliance will also increase the risk profile and increase the probability of inspections.
Q I have in my arable fields long-standing uncropped areas in headland margins, field corners and around trees.
Are these areas treated as arable within the calculation of my “arable area”. Percentages are spoken about but it is not clear what the percentages are of?
A Arable land is used for crop production, temporary grass and fallow, but excludes permanent crops. In this situation, as we understand it, if the land has been classed as having a margin under an arable option it would remain as part of the arable cropped area rather than permanent pasture.
Q Has Defra confirmed that one is able to opt out of entry level stewardship (ELS) requirements without penalty and yet within the contract period?
A Defra has announced that there is no conflict between greening and environmental stewardship (ES) starting before 1 January 2012. Stewardship options will not conflict with ecological focus area options and will count for both schemes without a reduction in payment.
Where ELS or Organic ELS (despite organic land being exempt from greening) started on or after 1 January 2012 applicants may:
- Withdraw from the ES agreement with no penalty
- Accept a reduced payment
- Add additional points to ES to make up for lost value
Higher level stewardship agreements are not affected, even agreements post 1 January 2012.
Natural England will be writing to all those agreement holders who are impacted by double funding shortly.
Q If I opt out of greening for two years and plough out permanent grass (within the limits) then if that permanent grass in the first year is fallow and put into temporary grass in the second year can I then increase my diversified second or third crop (temporary grass) for meeting the greening element in 2017?
A If permanent pasture is removed within the regulations and returned to crop production then it would be possible to use this land for crop diversification measures.
Q What realistic chance is therefore of the European Commission understanding the absurdity of the crop diversification element and in the midterm review making sensible changes?
A It is our understanding that the crop diversification rule is being challenged at a ministerial level, we hope this challenge is successful.
Q As I have grassed headlands (6m wide) around my arable fields and these headlands have been in grass for some 10 years can these be treated as not in the arable area and designated as permanent pasture?
Currently they are returned as OT1 along with the bulk of the field? In reality, they are not OT1 but PP1. In other words, for 2015 I would be accurately returning the area of arable cropping and the area of what is permanent pasture on the headlands. The bulk of the problem is that my arable area is about 34 ha.
A The land has been correctly coded as the option used under the 10 years of ES having been arable only options. They would not be classed as permanent pasture as they have existed as arable management options in an ES agreement.
The information provided in these articles does not constitute definitive professional advice and is provided for general information purposes only.
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