Single farm payment tax tricks

Farmers who let out land or provide services without written contracts under informal “barter” agreements risk losing valuable tax reliefs.

Julie Butler of accountant Butler & Co said: “To claim 100% of inheritance tax relief on a farmhouse it is essential to show that the farm is a business trading as a farm.”

If a retired farmer let neighbouring farmers keep stock on his land in return for mowing and other maintenance activities, that might not be considered the case by the Inland Revenue, she added.

There could also be problems with VAT, Capital Gains and Income Tax, said Mrs Butler.

“The clear action is that where barter exists the correct paperwork should be put in place, invoices for carrying out the work should be made and invoices for the availability for the grazing arrangement should be dealt with.”

Livestock farmers who bought suckler cow or sheep quota need to highlight the fact on their next tax return to safeguard potentially valuable tax breaks.

Now that these quota schemes have been replaced by the single farm payment the purchase cost of the quota can be classed as a capital loss, said Mike Harrison of accountant Saffery Champness.

This capital loss can be carried forward indefinitely and put against future capital gains tax liabilities that might occur after the sale of land or buildings, for example. 10,000 worth of quota could offset 4000 for a 40% tax payer, said Mr Harrison, who said it was important to register the capital loss on tax returns that were due no later than the end of January.

“The Revenue can get sniffy if you don’t claim a loss when you are supposed to.” This would make it more difficult to take advantage of any benefits, he said.

Quota broker Ian Potter said there would be quite a number of farmers who had spent 10,000-20,000 on quota, especially suckler cow quota.

Farms that lose money for five consecutive years could face higher tax bills under rules designed to prevent “hobby farmers” claiming attractive tax reliefs, says Mike Harrison of accountant Saffery Champness.

“It sounds harsh, classifying a loss-making business as a hobby, but the Inland Revenue wants to prevent people claiming perpetual losses against their other sources of income.”

There are two tax provisions that can count against loss-making farms, says Mr Harrison. “The first is common to all activities, the other specific to farming.

“The general restrictive provision prohibits the set off against other income of any losses from an activity that is not being carried out on a commercial basis and with a view to the realisation of profits. The losses arising can only be set off against future profits from that activity.

“The other provision specific to farming is an extension to the general rule, which adds on an additional restriction for loss relief against other income.

“Set off will not be allowed where the farming trade has resulted in losses for the five previous years.

“Basically, what this means is that a farm will not be able to balance its farming losses against the profits from other sources of income like the rent from farm cottages and full tax would have to be paid on those profits.”

Businesses that might fall into this trap need to plan their trading activities carefully as there are possible solutions to the problem, said Mr Harrison.

Although the Inland Revenue did give a concession during the foot-and-mouth period, they unfortunately have not extended the period for those who have been making losses through that period and subsequent years, he added.

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