Why changes to farm businesses need to heed separation rules

Many farm businesses are undergoing restructuring, and changes must be carefully planned so that tax, succession and family objectives are achieved without unintended consequences.

One of these is the possibility that a new or changed business or structure may not meet the tests for assessment as a separate business by the UK nations’ farm payments agencies.

The agencies use the information given on an IACS26 form to decide whether they will treat businesses as separate or not.

See also: Budget highlights need for inheritance document housekeeping

This form must be completed where an existing business is split into two or more businesses, or where a person is involved in more than one business registered on the payments agencies’ systems.

It is very detailed and requires supporting documents to show the legal status of the businesses, their accounts, invoicing and any sharing arrangements.

Bruce Masson, a partner with accountant Larking Gowen, points out that there is no statutory test for separateness, and while the IACS26 form is very detailed, it is not definitive in terms of the tests.

“The RPA [Rural Payments Agency] will take a holistic approach and it’s down to their interpretation. Even if you tick all the boxes, they can still deny it,” he says.

Historical changes

Two farm businesses he advises made structural changes involving the creation of new partnerships for family and succession reasons several years ago, completing IACS26 forms at the time and subsequently making separate Basic Payment Scheme claims.

Then, early this year, the RPA queried their IACS26 information and rejected their claims to separate status.

In one case this was because of the nature of the machinery sharing arrangements of two new partnerships created for family and business reasons, where previously there had been one business.

The farmers have in turn challenged the RPA and the matter is ongoing.

With the inheritance tax relief changes of the two most recent budgets prompting so much restructuring of farm businesses for genuine reasons, and considering the professional costs involved, Bruce warns that it is important to consider very carefully how things will be structured when changes are being made.

In both of the examples above, it was the submission of two separate Sustainable Farming Incentive (SFI) applications that prompted scrutiny of their IACS26 forms, he says.

Jeanette Dennis, a partner in law firm Ashtons legal, also advises caution and careful planning of structural changes involving existing businesses or creating any “new” business.

Professional firms must check the background of any business before acting, including asking who is the ultimate beneficial owner (the UBO).

Getting the identity of the UBO is a requirement already imposed on law firms, so they have to dig into who will ultimately get the money out of a business (called the “beneficial interest”), as well as asking who is really in control and taking the business risk decisions.

Administering more than one business through the same point of contact could even be a red flag for the agencies, she suggests, if appropriate structures and charges are not in place to account for this.

“There need to be real business reasons for creating new entities, which could include passing assets to the next generation or risk management for health and safety and compliance reasons; or even trading changes imposed by supermarkets or traders.

“Just changing for, say, SFI thresholds won’t work,” says Jeanette.

“This is the same already for tax: guidance from HMRC and case law for business changes and tax means, in some cases, you need clearance from HMRC as you can’t do something just to save tax – there always needs to be real economic purpose, too.

“I suspect the same guidance may be unofficially in a lot of government departments now.

“It would make sense for farmers to get similar ‘clearance’ if possible from, say, the RPA, before making changes and incurring costs.

“Also, it’s so easy now for all government agencies to find information from the internet and especially social media, which could give information about how businesses work,” she says.

SFI26 cap considerations  

At land agent and farm business adviser Cheffins, Katie Hilton, director of the firm’s rural division, says there has been a real increase in larger farmers looking to see how they can manage the caps that will be placed on SFI26 agreements, including potential restructures.

“With no SFI agreement able to be worth more than £100,000/year and with each farm business limited to one SFI26 agreement, this could severely curtail the environmental ambitions of large farms.

“We have seen, for example, farms considering restructuring options to gain another SBI [single business identifier] number.

“On the face of it, these can seem like legitimate reasons to create separate businesses, but you must be careful.”

Katie warns that farmers will need to be mindful to test the merits of any new SBI they create in the light of the RPA’s separate business questionnaire, IACS26, with regard to the trading status of the business, who is involved and in what capacity, and the address the business is registered to.

“It will need to be demonstrated that there is a legitimate reason for a separate business being formed.

“This might be, for example, that the individual’s percentage shares in each entity are significantly different.

“While the functionality of the rural payments system allows an individual to set up a new SBI at any time without consulting the RPA, it is recommended to ask the RPA to check the new account before proceeding further with scheme applications.”

Examples of potential restructures include a large estate recently taking a substantial block of land back in hand from an outgoing tenant and examining whether this can be kept separate from the main business for SFI purposes.

In the past, this would just have been transferred into the businesses’ main SBI.

FBT to CFA

“Another client with a substantial land holding of their own also holds land locally under a farm business tenancy [FBT].

“With this coming up for renewal, they are seeking a contract farming arrangement [CFA] with the landlord, instead of entering another FBT,” says Katie.

“The primary driver for this is to avoid the land currently tenanted contributing to the [current tenant’s] SFI agreement cap.

“By setting up a CFA, the land can be held under the landowner’s own SBI and therefore dealt with separately for SFI26 purposes.

“The shift from a tenancy to a CFA would present a legitimate reason for a landowner to create a new SBI.

“However, there is a series of considerations from the perspective of both parties before moving to a different business structure.

“In my experience, a new SBI may not be picked up on for some time by the RPA.

“But there is a dedicated team running background checks who may eventually realise there are new business records that need checking.

“At this point, the RPA would contact the farmer with IACS26 forms and ask that they are completed as proof that the new business is sufficiently distinct from the main business.”

At accountant Scrutton Bland, partner Jack Deal is also advising farming businesses on potential restructures, some with SFI26 in mind, and flags up the risks.

“Whenever caps are introduced, there are always moves to see how they might be managed.

“There have been moves towards breaking up businesses, but it takes a lot of thought and shouldn’t usually be done for a single reason,” he says.

“If the resulting two businesses are clearly under separate control then it can work, but if there is any evidence that it is contrived, it will not.

“Moving to a contract farming agreement will be beneficial in some cases for inheritance tax and other reasons.

“But it must be a genuine contract agreement and be demonstrated to work as such, where the farmer is taking commercial risk.”