Revenue clarifies SFP’s tax treatment

MOST FARMERS will remain eligible for key tax reliefs under the new single payment regime, Her Majesty’s Revenue and Customs (HMRC) has confirmed. But a few traps could catch the unwary.

Income tax
In most cases, single farm payments would be treated as farming income when assessed for income tax, said David Missen, a partner at chartered accountant Larking Gowen.

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In most cases, single farm payments would be treated as farming income when assessed for income tax

David Missen Partner at Larking Gowen

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“HMRC outlines three sets of circumstances,” he added. “The first is where farm trade continues, which can include partial or temporary cessation of production, like set-aside on less productive areas. In this case, income will be considered to be derived from farming.”

“The second is where production effectively ceases, but the business is still run with a view to profit.” This meant a trade was still being carried out – effectively “farming” the SFP, but earnings would be classed as trading income, Mr Missen said. “This means that farmers’ special reliefs – for example, averaging – will be lost.”

The third scenario relates to so-called “pony paddock” farming, where the farmer receives the SFP, but the land is not considered to be in agricultural production. “Income will be taxed as non-trading, or investment income. Expenses claimable against this are likely to be heavily restricted, so the tax bill is likely to be a lot higher,” he added.

HMRC also confirmed that the SFP will be taxable at the end of a farmer’s 10-month qualifying period and not when actual cheques are received. This was outlined a few weeks ago by the Institute of Chartered Accountants (Business, May 27).

In short it meant that juggling the end-date of the qualifying period would affect how much of the SFP would appear in a farm’s current financial year, said Carlton Collister of chartered accountant Grant Thornton. “That could give rise to a cash flow saving for some farmers.”

Inheritance tax
Which of the above three categories a farmer fell into would also affect the treatment of payment entitlements for inheritance tax, Mr Missen said.

“Business property relief will apply to entitlements used for a farming trade, and usually for other trades, too. But where income is deemed to have arisen from non-trading activities, entitlements will not be eligible for BPR.”

For most farmers, the important question was the IHT relief available on their remaining land and buildings, Mr Collister added.

“Land taken out of agricultural production can still qualify for agricultural property relief. But there must be an intention to return the land to agricultural production at some time.

“However, the HMRC has not commented on whether APR will continue to be available on the farmhouse and buildings,” he said. “This will be based on farm activities, so care will be needed to ensure valuable reliefs are not lost.”

Capital gains tax
Payment entitlements are subject to capital gains tax and are deemed to have come into existence on Jan 1, 2005.

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“Revenue and Customs have knocked on the head the idea that payment entitlements derive directly from the old quotas that they have replaced,” Mr Missen said. Instead, entitlements would be treated as new assets separate from land (generally business assets if SFP income is treated as trading income). They would have to be owned for a minimum of one year to start qualifying for taper relief.

The base cost for CGT purposes will be nil. This means the value of entitlements sold, with or without land, before or during this year will be subject to the full CGT rate. “This will be a big change for most farmers, as usually land has a high base cost and, therefore, escapes CGT,” he added. “Now, transactions must be treated as separate disposals, so the value of entitlements will be subject to CGT.”

Leased entitlements are treated as investment income. Some tenants and landlords could be caught out, Mr Collister warned.

“A potential trap arises where the entitlement is transferred at no charge to the landlord at the end of the lease. This could result in the landlord being taxed on a perceived rental premium. The tenant could also be treated as having made a disposal and so could be stung for CGT.

“However, if it can be shown that agreement to transfer is a genuine arm’s-length transaction; for example, where the tenant has no interest in receiving SFP and is not providing a gratuitous benefit to the landlord, then this should be fine,” he added.

Value added tax
Single farm payments would not be subject to VAT, Mr Collister said. Leased entitlements would not normally be liable either. But if entitlements were sold separately or with land, then they were likely to be standard-rated, he added. “This is different to what had been thought and will be important for those selling payment entitlement.”

Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

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