Business Clinic: What is most tax-savvy option for arable farm?

Whether it’s a legal, tax, finance or management question, Farmers Weekly’s expert panel can help.

Here, Kate Bell, of Albert Goodman chartered accountants, advises on the tax implications of four business scenarios for an arable farm.

See also: Business Clinic: How do we set up permissive access?

Q: We are arable farmers (farming in partnership) and are hurting after three poor years, despite having a reasonable size farm of 400ha, all croppable.

As a result, we are considering all options including renting out the farm, going into environmental schemes (if they come back), entering into a contract farming agreement or ceasing altogether.

Please can you outline the tax implications of the options?

A: As businesses evolve, there should be a constant review of the tax position, but the tax implications should be considered alongside cashflow, workload and the overall aims of the business/family.

Broadly, the more you retain an active trade, the more tax reliefs you may preserve. The more the farm becomes an investment (for example, long-term letting), the more the tax position may change.

Below is a tax guide to the main options you’ve outlined.

Continue farming

Continuing to farm is continuing to trade.

• Income tax: Allowable business proportion of farmhouse expenses and motoring; farmers’ averaging; loss relief against other income; and relevant earnings for pension contributions.
• VAT (value added tax): Crop sales are taxable supplies (albeit zero-rated), enabling VAT registration and input VAT recovery.
• CGT (capital gains tax): Trading businesses should qualify for business asset disposal relief (BADR), rollover relief, and gift hold-over relief on the disposal of land and property.
• IHT (inheritance tax): Business assets should qualify for agricultural property relief (APR) on the agricultural value and business property relief (BPR).
• Other: If losses have been persistent, keep evidence to show the business is run commercially with a view to profit.

Rent the farm out

This is an investment activity, not a trading activity.

• Income tax: Rent is property income, not trading income so no national insurance (NI) to pay, but income tax is 2% higher than on trading income. There are generally no deductions for farmhouse or motor vehicle expenses, and it is not counted as relevant earnings for pension purposes.
• VAT: Rental income is typically VAT-exempt (unless you have opted to tax) which may mean no VAT reclaim on costs. It will complicate your VAT position – take advice.
• CGT: Once the activity is mainly letting, reliefs such as BADR and rollover relief may not be available.
• IHT: There may be a loss of BPR where the business is predominantly investment. APR may still be available on the agricultural value of land and buildings used for agriculture but relief may be lost on the farmhouse.
• Practical point: Consider the long-term ownership position prior to a change of use, as the land should currently qualify for gift hold-over relief.

Contract farming agreement (CFA)

A well-structured CFA can keep you farming for tax purposes while outsourcing operations.

The agreement (and the reality) should show you retain key decisions and a meaningful share of risk and reward to maintain trading status for tax.

• Income tax: Same as if you were to continue farming. Farmers’ averaging may be key if you sell machinery after claiming capital allowances at the point of purchase, as the proceeds may be subject to income tax.
• VAT/CGT/IHT: Same as continuing to farm.
• Practical point: Success depends on choosing the right contractor.

Environmental schemes

Sustainable Farming Incentive is subject to change, as we’ve seen. They are also a complicated area for tax purposes, particularly while still waiting for guidance from HMRC.

• Income tax: The tax implications depend upon the agreement (and conservation covenants) and what happens in practice – for instance, whether you lease the land to a third party to operate the environmental scheme, carry out the management of the habitat yourself, continue to farm the land, and so on.
• IHT: While we have had some comfort that APR may be available in certain circumstances, BPR is not guaranteed.
• Practical point: The tax implications can be substantial so advice should be taken before entering into any agreements.

Ceasing altogether

• Income tax: There is no ability to average in the final year of trade, and selling machinery (as above) could lead to a spike in taxable profits, with higher rates of tax being paid.
• CGT: If you are selling land and property assets, plan for BADR.
• IHT: A full exit can convert relievable assets into cash and investments, which are generally chargeable to IHT.

Overall

While choosing to stay actively trading offers a more attractive tax regime, other opportunities may offer higher returns and may be the best decision commercially.

Take advice on your specific circumstances so that tax and business structure planning can be put in place to minimise any negative tax consequences.

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