Tax wish list for the new government
Whatever the makeup of the new government, everyone in the rural sector will be hoping that those in power understand and protect the delicate state of UK agriculture, writes Andrew Vickery of Old Mill Accountancy.
A key part of this will be to maintain many of the existing tax reliefs which the sector benefits from while avoiding changes which could be to the detriment of rural businesses.
Below is an outline of the top five tax issues on this wish list:
1. No VAT on food
The thought of an extra tax on food would have been unthinkable a couple of years ago, but the urgent need to raise taxes has put the spotlight on VAT. While a suggested levy on food sales, predicted at 3 to 5%, remains less likely than a rise in the standard VAT rate above the current 17.5%, the effect on UK agriculture would be damaging.
The measure would reduce the margin of the supermarkets on their food sales, who between them, sell the vast majority of food to consumers, meaning that the tax cost would almost certainly be passed back down the food chain to the producers and farmers.
The suggested measure has been roundly attacked as a “tax on living” and will hopefully be discarded by the next government, if for no other reason than it would disproportionately affects poorer families.
2. Sensible approach to IHT
Under the Labour regime we have seen a number of key cases that have challenged the long established Business and Agricultural Property Reliefs against Inheritance Tax. While in most cases careful planning can eliminate IHT, the uncertainty that the current case law brings to farming families is certainly not helpful at a time when succession planning within agriculture is more important than ever. The new government must appreciate this and ensure HM Revenue & Customs does too.
3. Keep company tax rates low
The increase in the top rate of personal tax to 50% was a key talking point of the election but most politicians are reluctant to criticise the high tax rates that higher earners suffer. In contrast, there seems a genuine desire to keep the rate of tax that small businesses suffer on their profits at a more modest level, in acknowledgment that it is such businesses that will help to bring the economy back to better health.
This gives an important planning opportunity for farming businesses. While individuals who trade either as sole traders or within partnerships could pay tax on their profits at 40% or even 50%, plus National Insurance, those who operate as Limited Companies will only pay Corporation Tax at 21% on profits up to £300,000. Those individuals suffering personal tax at the higher rate should consider as soon as possible whether they can structure their businesses in a more tax-efficient way to take advantage of this.
4. Incentives to reinvest
The introduction of the Annual Investment Allowance in 2008, allowing businesses to claim 100% tax relief up to £50,000 per year on capital purchases such as plant and machinery, was welcomed by most farming businesses, as was the extension of the allowance up to £100,000 per year from April 2010.
Unfortunately the changes in 2008 also led to the withdrawal of tax allowances on Agricultural Buildings, meaning that from April 2011 onwards no tax relief will be available to businesses that have invested in farm buildings. A reinstatement of that buildings relief would ensure that businesses can regain some incentive to continue investing in buildings.
5. Widening R&D reliefs
Research and innovation in UK agriculture has suffered with the decline in farming profits. In contrast, many other sectors of the economy make substantial tax savings from qualifying R&D activities for which they can receive an extra 75p of tax relief for every pound spent.
It would be a great boost to the industry if the scheme could be made more accessible to farming businesses, perhaps to encourage groups of farmers to invest in co-operative research schemes or to incentivise individual businesses to invest resources in, say, their own on-farm breeding programmes.