Farmers should consider claiming their single farm payments in euros, says David Douglas, head of agribusiness development at Clydesdale Bank.
Careful financial management of the SFP could produce borrowing and repayment benefits for farmers while helping to reduce the currency exchange risk which is part and parcel of the new system.
By electing to receive the SFP in euros, rather than sterling, producers have the opportunity to create a secure euro income stream, clearing the way to take euro-based loans at interest rates which are currently lower than UK rates, says Mr Douglas.
At present, a euro-based loan for £250,000, starting in March 2006 and running to the current “declared” conclusion of SFP in 2012, shows a potential saving in repayments of about £13,000.
That’s due to the difference between eurozone and UK rates, a benefit that continues to exist despite some narrowing of the gap between the two rates.
In the past, many UK businesses were effectively prevented from setting up loans at eurozone rates due to the lack of a secure euro income.
Not having sufficient euro income to cover loan repayments created an exposure to exchange rate fluctuations, meaning that money saved on loan repayments might subsequently be lost during currency transfer.
Now that SFP provides a guaranteed euro-in/euro-out option, the picture has changed completely.
Ironically, the main exposure to currency risk now applies to businesses which leave the sterling-to-euro transfer to the government.
Under current procedures, the UK’s sterling-based SFP income is converted to euros on the basis of just one day’s trading rate.
The eggs-in-one basket day last year was 30 September.
Taking SFP in euros returns the control of currency exchange to the business concerned.
Exercising personal control over this aspect of SFP finance, of course, requires just as much care and attention to financial management as applies to the task of assessing the value of embarking on a euro-based loan.
In each case, it’s vital to seek independent advice that you trust.
Certainly, the experience of those who ticked the SFP euro box last year suggests that an investment of time and effort ahead of the next euro selection deadline, which comes up in May, could be extremely worthwhile.
Tax issues are never simple and those affecting the single farm payment are no exception. Mike Harrison of accountant Saffery Champness looks at some common queries.
A. Only after January 2007, and if you are using them within a trading business. Otherwise, non-business asset taper relief will apply, which is less generous, leading to a higher rate of tax (maximum of 40%).
A. Yes, it would appear that this is the current position. While no cash will change hands at that stage, you will be making a disposal for Capital Gains Tax purposes. The disposal value will be the market value of the entitlements on the date the tenancy ends.
Q. I am a farmer; can I defer my tax liability on farmland disposal by purchasing entitlements?
A. Yes, provided the appropriate time limits are met, it is now possible to roll over the gain into the purchase of entitlements. However, it’s important to remember that the deferred gain will be taxable when the new asset is disposed of and taxed at the then-applicable rates of tax.
A. The value of the entitlements at the date of death, or at the time of transfer, if earlier, will be subject to the normal Inheritance Tax rules. Provided the entitlements are owned and used within a trading business, 100% relief should be available. However, if there is no business activity, unfortunately, no relief will be available.
A. Entitlements are a separate asset; therefore, if a will states: “I leave Manor Farm to my son and the remainder of my estate to my daughter,” it would be questionable whether the son would actually receive the entitlements. Therefore it would be wise to ensure the will is explicitly clear on this point. You should also consider, as always with a specific legacy, where any tax liability should be borne.
Q. When is the Single Farm Payment taxed? On receipt or in the year to which it relates?
A. It will be taxed in the accounting year in which your occupation period ends. However, the amount included will be the proportion relating to the number of months of the accounting year that fall into the scheme year. Therefore, if the accounting year is 30 November 2005 and the occupation period ended on 31 October, eleven twelfths of the 2005 SFP would be included in the 30 November 2005 accounts and taxed as part of the farmer’s income for that year.
A. The single farm payment is ignored and included in your next accounting and tax period.
Mike Harrison will be answering more of your queries at fwi.co.uk/forums