A question of legality

QI”ve read in the newspapers that the Inland Revenue is targeting companies or partnerships where the wife of the business owner receives a share of the profits. My wife is a partner in my farm partnership. She receives a profit share but does little actual farm work and has very little capital in the business – should I be worried?

 A You are right to be concerned. In April 2003 the Revenue published its view that certain tax legislation (s660 of the Taxes Act) potentially applied to businesses where the effect of the ownership arrangements was that income was diverted from a higher rate tax payer to a lower rate taxpayer.

There was widespread disagreement with the Revenue”s view but this has not changed its stance. In late 2004 it narrowly won a test case involving a limited company where the shares were owned equally by a husband and wife but the wife had little involvement in the business.

The Revenue could also argue that the situation where your wife is a partner in the farm partnership but does little work on the farm and has not contributed any capital to the partnership could be covered by the legislation. This would mean that any profits allocated to her in excess of a commercial reward for her services would be taxed on you, thus clawing back any tax savings.

 You need advice on the specifics of your situation but you could consider documenting the actual work done by your wife. This may be more substantial than you think and could legitimately include bookkeeping, secretarial duties and any other time she may spend on behalf of the business, such as telephone calls, collecting and delivering parts and supplies of produce.

You could also give her capital in the business so that she is not only entitled to a share of the income but also some of the assets.

Answered by Paul Wood, partner, Reeves and Neylan, Canterbury

Q My farmhouse controls 300 acres of family-owned land and 370 acres of tenanted land. To obtain APR on the farmhouse, what do you feel would be the minimum area of cropped land on a) the owned land and b) the rented land?

A APR on the agricultural value of a farmhouse is a very topical area, which is changing and developing and on which the Capital Taxes Office will review each case on its individual merits.

 Recent cases have indicated that certain of the factors to be taken account of in the “character appropriate” test are the history of the farmhouse and the link with the farmed land, and the “elephant” test. The latter basically queries whether a layman would see the property as a farmhouse and integral to the farming activities.

 The introduction of the single farm payment is also of relevance, particularly given the opportunity for certain land not to be cropped, while still receiving a decoupled payment, to which you effectively refer.

The Inland Revenue has intimated that, for the short term, the receipt of the single farm payment in a business that has historically farmed is likely to continue to be treated as trading income, even if no crop is grown.

However, it is not clear what their view will be if they conclude in the future that there has been a permanent cessation of production.

Assuming that the farmhouse owner is a sole trader or partner in the business farming the land (which will be of critical importance), and that there is a good history of agricultural activity, you have a good case for claiming APR in the current circumstances.

 In my view, this would still be the case if approximately half of the total land continues to be cropped. However, if you decide not to crop substantial acreages under the single farm payment scheme, you will need to monitor the response of the Inland Revenue for their view of the taxation impact of such action.

Answered by Mark Balfour, partner, Larking Gowen, Norwich

Q My wife prepares the VAT return but is unsure when it comes to questions such as farmhouse repairs, export and import of machinery to the EU and how we claim the VAT on the construction of a farmhouse.

 A Farmhouse repairs: HM Customs & Excise has an agreement with the NFU that up to 70% of the VAT can be claimed on farmhouse repairs, such as roof repairs, new kitchens or replacement windows. If the work involves an extension, for example, then prior agreement is needed from the local VAT office.

 In addition if the work involves part of the house which is primarily for private use (for example the bathroom) then the VAT claim will be a lot less than 70%.

The rules concerning farming companies are more restrictive because the farmhouse is effectively the director”s accommodation.

 Export/import of goods: Where a machine is sent to the EU then the VAT number of the purchaser is needed and evidence of the export should be kept. If this is done then the supply can be zero-rated.

For imports, your VAT number should be supplied and again it will be zero-rated. However when completing the return you need to apply the acquisition procedure whereby you calculate the VAT on the purchase and add this figure both to your outputs (Box 2) and reclaim (if applicable) in Box 4.

Construction of farmhouse: Normally the VAT charged by contractors would be zero-rated. However if any VAT is suffered on the purchase of materials then it should be claimed via a DIY self build scheme. It should not usually be claimed via the normal farm VAT return.

Answered by Faye Armstrong, Dodd & Co, Carlisle

 Q I had always believed that my father had kept the title deeds for our farm when he moved out of the main farmhouse into a bungalow in the village. My father died some years ago, and my mother passed away only recently. On clearing out her bungalow we could not find the title deeds anywhere. I have looked everywhere they might possibly be (like the bank) but now realise that they may never be found. I have been told recent changes have made title deeds obsolete. Is this true?

A The Land Registration Act 2002 came into force on Oct 13, 2003. Before its enactment Registered Land had its own land or charge certificate, which was the principal proof of ownership. Now all Registered Land is recorded on a computer database and print-outs with the owner”s name and details of the land itself can be obtained by contacting the Land Registry.

Unfortunately, you may not know if your farm is registered or unregistered. It is my experience that a large number of country properties have not yet been registered.

The old system runs side by side with the new and is governed by conveyances, executors” assents and the like. Documents need to go back at least 15 years to prove that you hold a good title to the land.

 It is the ultimate intention of the government that all unregistered land should eventually be registered, and unregistered land has to be registered whenever a dealing takes place. If your farm is unregistered and you have lost the title deeds all is not lost. With a plan of the farm a solicitor can produce a statutory declaration that can then be sworn and produced to the Land Registry for a voluntary first registration showing you as the owner. The title will not be of the best quality, but you will be registered as the owner of land and, as time passes, this title will improve.

Answered by William Green, head of agriculture, Burnetts Solicitors, Carlisle