Who will you
hand over to?
Will you pass the
Save tax on
PLUS: legislation, economic outlook, IHT and more helpful tax advice
Farming.indd 1 7/2/11 20:31:58
3 Time to sell?
4 How to outrun HMRC’s
‘Dash for Cash’
5 Will you pass the ﬁngernail
6 Who will you hand over to?
8 More than just a leap of faith
10 Taxing times!
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Farming.indd 2 7/2/11 20:31:59
FURNISHED HOLIDAY LETS
Time to sell?
With the Government only granting a temporary reprieve on its decision to axe tax incentives on
holiday lets, is it time for farmers to think of alternative arrangements?
When the Government ﬁrst announced in the 2009 rentals.
Budget that it was going to withdraw tax incentives on
furnished holiday lets – vital to many farming incomes Because the rules only beneﬁted owners of property in
– there were protests from farmers up and down the the UK, to the exclusion of properties in Europe, the UK
country – and understandably so. Government was forced to accept that the rules might
be in breach of EU law. However, rather than extend the
For many years, furnished holiday lets (FHL) have favourable tax treatment to all properties located in the
been an important revenue stream for farmers, many EU, the government decided to remove the rules alto-
of whom have converted derelict or dilapidated farm gether (or it did until opposition parties’ insistence it be
buildings into plush holiday homes for people wanting to removed from the 2010 Finance Bill during the last-min-
experience rural holidays. ute ‘wash up’ session prior to parliament’s dissolution).
However, the Government’s announcement that it The Labour party has proposed to reintroduce the
would repeal the tax concessions from April this year proposal to remove the tax breaks if it wins the election,
was expected to have dramatic consequences. Fortu- although whether it returns to power is anybody’s guess.
nately, the Government has been forced to postpone the
move until after the general election, in order to force One thing’s for sure, if it’s been the agenda before, it
through the 2010 Finance Bill. will likely stay on the agenda – whoever comes to power.
The switch from earned income to unearned income has
It is, however, likely to be only a temporary stay of ex- serious repercussions for both income tax and capital
ecution and, given the results of the changes are poten- tax purposes. As a result, holiday cottage owners really
tially far-reaching, it could be prudent for farmers who could be hit by a tax double whammy.
own holiday cottage to review their tax planning as soon
as possible. In the longer term, the fact that let holiday accommo-
dation will no longer be considered a business asset,
The longstanding FHL rules - introduced in 1984 – were has potentially far reaching implications for capital gains
designed to provide simple and objective tests to de- tax planning. Reliefs that are available on business as-
termine when self-catering holiday accommodation sets, such as roll-over, hold-over and entrepreneurs’
could be treated as a trade for income tax, corporation relief might no longer be available. Many farmers who
tax and capital gains tax purposes. The rules beneﬁt a own holiday cottage owners will probably be asking
wide range of property owners, from businesses such as themselves whether the considerable time and effort
hotels with self-catering accommodation, holiday parks, involved in running furnished holiday lettings is worth it
static caravan sites and, of course, farmers with holiday any more.
Farming.indd 3 7/2/11 20:32:00
How to outrun HMRC’s
‘Dash for Cash’
HM Revenue’s & Customs new tax collection initiative might seem like a positive development, but
with tax inspectors opting for increasingly aggressive tactics, what can you do to defend yourself?
Although sounding more like a race for Premiership consistent: in other cases we have seen substantial tax
footballers, the ‘Dash for Cash’ is the name given to a liabilities ignored for months. The general trend is now
new HMRC tax collection initiative. towards much more aggressive tax collection.
HMRC’s aim is simple: to collect as much tax, as 2. If you cannot pay your tax, come to a deal with HMRC
quickly as possible. to pay over a period – we negotiate a number of defer-
rals for clients. If you negotiate with HMRC yourself, do
Unlike Olympic Champion Usain Bolt, who at the time make detailed notes of telephone conversations, includ-
of going to press had decided not to compete in the ing dates and times.
UK since it would affect his tax status, most of us
have little choice but to remain in the UK and pay 3. Avoid unnecessary penalties – there are a huge
our tax. number of penalties and surcharges for late
submission of all kinds of tax forms, as well as
How is HMRC implementing the new policy? those for being late with tax payments.
With a deﬁcit of £160 billion and major Public 4. Be prepared to argue your case
Sector spending cuts to be announced in the – with the emphasis on settling tax
autumn, the Government has introduced disputes and collecting cash, tax
longer-term tax increases in the Budget, but inspectors are becoming more
in the short-term has instructed HMRC to up amenable to agreeing a deal to
the pressure on tax collection. settle long-term disputes.
The “Dash for Cash” was originally seen as a 5. Tax Planning is very much alive!
change to the way tax investigations were handled: High personal tax rates are likely to be
instead of long-term negotiations, with fundamental around for some time: tax planning such as
disagreements being taken to Court, tax inspectors are switching income between spouses, timing
now more willing to negotiate compromises – provided of dividends, etc. are all relevant.
tax is paid quickly.
6. Minimise CGT on property sales – the
This may sound positive, but there are a number of less increase in the rate of CGT was expected,
welcome developments. Tax collectors are much more bringing this in with immediate effect was a
aggressive, we have seen some awful cases of payment surprise. There is now a substantial difference
agreements being cancelled by HMRC and proceedings between the top rate of CGT at 28% and the
started before the client has a chance to defend his posi- business rate of 10% (on total gains up to £5
Recent Budgets, including the two so far this year, have
strengthened HMRC’s position with new penalties and 7. Limited companies – with a top rate of personal tax
powers. There has also been announced a number of tax at 50% and the announcement in the Budget of a cut in
raising plans, VAT and Capital Gains Tax (CGT) increases Corporation Tax (large company rates reducing to 24%)
being the most publicised. the use of companies will become more common.
Eight ideas to out run HMRC’s new policy and the tax 8. VAT – the increase to 20% was no surprise, and
changes introduced in the Budget the delay to the New Year will give businesses time
to prepare. For small businesses with turnover under
1. Wherever possible, pay your tax on time – tax collec- £150,000 consider the Flat Rate Scheme: there are dis-
tors have called clients on the day after tax is due with counts available and the rates announced in the Budget
threats of legal proceedings, sometimes telephoning the can be attractive.
person’s home in the evening. HMRC’s approach is not
Farming.indd 4 7/2/11 20:32:01
Will your nails
pass the test?
With the growing popularity of contract farming type arrangements, farmers are having to prove
their involvement – or else face an Inheritance Tax problem
Contract farming is an arrangement where someone is • the agreement –all contract farming arrangements
contracted to farm the land and the proceeds from the should be supported by a written agreement and this
sales of the crops are split between the two parties. document should be drafted carefully. Ideally, the risks
and proﬁts arising should be shared between both par-
Often, however, these arrangements could create an ties.
IHT issue, particularly if the arrangement is not struc-
tured correctly. This issue could be particularly relevant • the day-to-day management – it is important that the
to the so-called ‘lifestyle farmers’ who have purchased land owner continues to be involved in the running of
farms in recent years – pushing agricultural land prices the farm, such as the deciding what crops to be planted.
up dramatically. There should be regular meetings between the landown-
er and the contract farmer. Minutes of these meetings
One of the beneﬁts of agricultural property is the should be retained.
favourable IHT treatment – agricultural land and associ-
ated buildings are effectively exempt from IHT through Overall, contract farming type arrangements have
a tax relief called Agricultural Property Relief. However, become more popular in recent years and have worked
HM Revenue and Customs (HMRC) has, in the case of successfully for many farmers.
some contract farmers, attempted to challenge the use
of this relief – generally the farming land itself will not However, landowners in particu-
be subject to any restriction but some of the associated lar, need to be careful that the ar-
buildings could be. rangements are structured
correctly to ensure that
HMRC has argued that, because the landowner is not a valuable IHT relief
actively farming the land but is effectively renting the is not lost. They’ll
land to the contract farmer (known as the ‘dirty ﬁnger- need to get their
nail test’) the Agricultural Property Relief for some farm hands dirty, liter-
buildings may be restricted. ally, if their farm-
This arose from a tax case, the executors of D Mckenna are to pass
v HMRC, where HMRC successfully restricted the Agri- muster.
cultural Property Relief available on some farm build-
ings on the basis that the land was not being actively
managed. In this case the landowner had very
little involvement in the management
of the farm and a land agent
dealt with the contract
In light of this case, it is
crucial that farmers who are
involved with, or are consider-
ing a contract farming arrange-
ment, structure the arrangement
correctly. The two main issues to
look out for with these arrange-
Farming.indd 5 7/2/11 20:32:03
Who will you
hand over to?
Many farms have passed down from generation to think their business would be interesting to other people
generation and remained within families’ hands for so ride it out until retirement, then leave without thinking
hundreds of years. But, with the younger generation about selling on.”
now increasingly lured away to the bright lights of
the big cities, how can today’s farmers ensure their A study commissioned by the Treasury and carried out
businesses don’t go to seed? by the Small Business Council investigating reasons
why some entrepreneurs fail to hand their business
Every year an estimated 100,000 businesses on revealed that changing social demographics mean
nationwide close unnecessarily – with a loss of half a fewer people want to join the family business, while
million jobs – due to failure to plan for succession. A there are a growing number of ‘third-age’ entrepreneurs
lack of planning means that relatively few businesses who are retiring younger.
are passed down through the generations.
“This is a problem because a lack of succession
Recent research has shown that many entrepreneurs planning can hold back business growth – and
admit they did not know how and when they would give succession failure can damage local economies
up their business. through loss of jobs, knowledge and expertise,” warned
Kenton May, a partner at Burgess Hodgson, said that
owner-managers often delay succession planning until Reasons for failure in this area fall into a few broad
their later years – a factor that meant not enough time categories, including essential knowledge held only
was available to develop an effective plan. by the outgoing owner and a lack of willing or suitable
candidate to take over the business.
“Business transfers – which include management
buy-outs, family successions and sales to independent When considering succession various options exist.
buyers – have proven to be considerably more effective These include handing over ownership to offspring
than start-ups at generating employment and generally or other relatives, passing control to a non-family
have a better survival rate,” he said. manager or disposing of the company through a sale,
management buy-out (MBO), management buy-in
But a succession plan could take several years to (MBI) or voluntary liquidation.
put in place. It’s no surprise, then, that a study by the
Government-backed Small Business Service found Handing over control to a relative is the most popular
that a lack of forward planning was to blame for the choice for family business owners. Many who opt for
difﬁculty entrepreneurs face when looking to sell on this route feel happy they are leaving the company in
their business. safe hands and conﬁdent they will be able to continue
to play a part in running it.
And, despite tax breaks introduced by the former
labour Chancellor Gordon Brown, including 100 per “An advantage of home-grown talent is that the
cent property relief for inheritance tax purposes and a candidate will understand the company culture, making
10 per cent rate of capital gains tax on assets held for it a safer option in terms of disruption to the business,”
more than three years, owners are still daunted by the explained Kenton. “And their appointment avoids any
prospect of selling on. potential de-motivation that may be caused if outsiders
are brought in.
Many owners cite the mountains of red tape as a factor
affecting their decision to sell. But, says Kenton, it is But care should be taken when picking a successor as
a lack of sound advice and consultation with qualiﬁed decisions are often made on emotional grounds or to
professionals that is often to blame for so many avoid family arguments.
businesses ending prematurely.
“While the most obvious person may be the eldest
“Many small business owners are too busy running child, for example, he may not be the best choice for
their business and planning so far ahead takes up time the company,” said Kenton. “It may also be tempting
they have not got,” he said. to put different children in charge of different parts of
the ﬁrm to demonstrate equal treatment. However this
“Another thing is that many people do not necessarily can cause problems later on, so aim to pick one main
Farming.indd 6 7/2/11 20:32:21
If no relatives are deemed suitable, or want the role,
an alternative person from outside the family must
be found. This could be someone who already works
for the company, a business adviser, or a complete
stranger. The process used when appointing a relative
should also be followed when choosing an external
“Appointing an external successor can be a contentious
issue so all staff members should be made aware of the
reasons for the decision and the beneﬁts it will bring to
the company,” explained Kenton. “To avoid any conﬂict
or resentment, key employees should be involved in the
whole succession process including the training and
Deciding to sell a business can also be a hard decision,
but it may well be your most appropriate option. And, to
secure the best price for your company, it is essential
that you plan well in advance.
“You will need to advice on ensuring your business
commands the most competitive offer,” said Kenton.
“You should also ensure that any issues which could
endanger the sale of your business are overcome. This
includes any legal action being taken against the ﬁrm or
Handing over a business that you’ve grown and
nurtured is not easy. But, with the right help, you can
make plans for succession early and ensure you pick
the most appropriate option for your business.
Farming.indd 7 7/2/11 20:32:29
More than just
a leap of faith
Some ideas for successful farm diversiﬁcation are proven; others might owe a little to luck. But
if you want to make the most out of your diversiﬁed business, you need to choose the business
structure which suits your venture best
Farming.indd 8 7/2/11 20:32:30
For many years there has been increasing pressure on As we mentioned above the structure of a diversiﬁed
farmers to diversify and it is now reported that 51% of farm business does very much depend on the circum-
farms have some form of diversiﬁed business. There are stances of the existing agricultural business. However
currently thousands of diversiﬁed agricultural businesses the example below shows how a diversiﬁed business
springing up around the country – from clay pigeon shoot- could be structured.
ing to ﬁsheries to farm shops.
John runs a traditional arable farm that generates
The beneﬁts of diversiﬁcation are clear: a broader income proﬁts of around £45,000 each year – the business
base and some protection from the uncertainty of crop/ is set up as a sole trade. John is looking at setting
livestock prices, but it is crucial that any diversiﬁed farm up outdoor pursuits centre with quad biking and clay
business is set up correctly. But what are some of the pigeon shooting etc. It is anticipated that the business
potential structures that a diversiﬁed farm business could will be loss making initially and substantial investment
take and what are the beneﬁts? in new equipment will be needed.
What composition is best for a diversiﬁed farm business An unincorporated business can be beneﬁcial if
will depend very much on a farmer’s individual circum- the business will be loss making initially – this is
stances and the status of the existing farm business, but because these losses can be set against any other
the various structures can be broadly split into two types; income to reduce the tax payable. If for example the
unincorporated and incorporated. business made a loss of £45,000 in the ﬁrst year then
this could be set against the proﬁt from the farm to
Unincorporated reduce its total income, and tax payable, to nil.
These are the simplest business structures and consist of
sole traders and partnerships. It is very easy to set up an The investment in new equipment is likely to qualify for
unincorporated business and there are not many adminis- the Annual Investment Allowance relief so this could
trative requirements – apart from completing a tax return be set off in full against any income arising.
each year. After two years John’s new business becomes suc-
cessful and is soon generating proﬁts of £40,000 per
In terms of taxation unincorporated businesses are often year.
not the most efﬁcient structures but this does depend on
what proﬁts the business generated - if the business is The income from the new business is now added to
loss making initially then an unincorporated business can John’s farm income and will all be taxed at the higher
be useful. 40% rate of income tax – plus National Insurance. Now
is the time to consider changing the business structure
Incorporated to achieve greater tax efﬁciency.
These are the ‘Limited’ companies and are actually sepa-
rate legal entities from the owner (s) of the shares in the At this stage the transfer to a limited company struc-
company. Setting up a Limited company does involve a ture becomes more attractive - and this is achieved by
reasonable amount of administration and they need to be effectively selling the business to a new limited com-
registered with Companies House. pany, John’s Outdoor Pursuits Limited. This transfer
of the business can in itself be a useful tax planning
One of the key advantages of a Limited company is that, as opportunity.
they are separate legal entities, they protect the owner’s
personal wealth from legal claims etc. The owner’s liability With the new structure the company will be taxed
is limited to the amount that they invest in the company. on the proﬁts it makes and John will be taxed on the
amounts withdrawn – however overall the taxation po-
Limited Companies do however allow proﬁts to be ex- sition will be more efﬁcient than a sole trade business.
tracted in the most tax efﬁcient way – although this does
depend on the owners other income and proﬁts from the As an additional point diversiﬁed farm businesses
existing farm business. could have a substantial impact on the VAT status of
an existing farm and this is a complex issue. Profes-
A recent Defra Farm sional advice will be essential if the VAT status may be
Business Survey found that The tax effectiveness of a business is clearly impor-
diversiﬁed enterprises tant, nobody wants to pay any more tax than they need,
but there are other issues involved when selecting a
generated 10% of the total business structure. Therefore expert professional ad-
vice with regard to business structures is essential.
income of farm businesses
Farming.indd 9 7/2/11 20:34:50
Now that the coalition government has delivered its ﬁrst budget, we assess whether the new tax
measures, while not being too painful for the general economy, will have a signiﬁcant impact on
the rural economy - and what the options might be
Farming.indd 10 7/2/11 20:34:52
Now that the dust has settled from the Coalition proposed to increase the tax free IHT allowance to
government’s ﬁrst Budget the general reaction is £1 million. However this policy has not survived the
relief – the tax measures outlined in the Budget were coalition government and in fact the IHT tax free
less painful than had been anticipated. allowance has been maintained at £325,000.
However there will be individuals and businesses that Impact on the rural economy?
will be affected by the new measures announced.
Generally not good news. The change makes it more
important than even to make use of the exemptions
VAT available for agricultural property – see our article in
this brochure about the ‘dirty ﬁngernail test’.
Without doubt the stand out announcement in the
Budget was the increase in the VAT rate to 20% from Corporation Tax
January 2011. There were rumours before the Budget
that such an increase was being considered but the
announcement was something of a surprise. Perhaps a surprise measure in the Budget was the
reduction of Corporation Tax rates – the main rate will
Generally any increase in VAT will impact on fall by 1% per year to 24% whilst the small company
consumers rather than businesses, which are able rate will be reduced to 20%. Obviously this is good
to recover VAT. However organisations that are not news but this has been funded by cutting the Annual
able to recover VAT may suffer – see the article on our Investment Allowance limit to £25,000.
website about how charities could be hit by the VAT
rise. The Annual Investment Allowance (AIA) allows
businesses to obtain immediate tax relief for the
Impact on the rural economy? investment in most business equipment and previously
the limit was £100,000. The reduction in the AIA limit
Generally farmers are able to recover the VAT that they will not come in until April 2012.
incur so there should not be any signiﬁcant impact
here. The sale of basic food stuffs is ‘zero rated’ Impact on the rural economy?
– meaning that no VAT is charged on the sale but VAT
on purchases can be recovered. Clearly the reduction in Corporation Tax limits is good
news for many farmers.
Capital Gains Tax However the reduction in the AIA limit could be painful
for farmers – many items of agricultural equipment
Potential changes to the Capital Gains Tax regime will cost far in excess of £25,000. With the limit falling
were widely leaked before the Budget and it was from April 2012 the timing of investments will be
suggested that the rate of CGT could increase to as important and it may pay farmers to bring forward
much as 50%. In the end the actual changes were less some investments.
draconian than feared with CGT increased to 28% for
higher rate tax payers. Overall, our assessment of the Budget for the rural
economy is broadly positive and perhaps could be
In addition the lifetime limit for ‘Entrepreneurs summarised with the phrase `not as bad as it could
Relief’ was increased to £5 million. Entrepreneurs have been’. Whatever future Budgets will throw at the
Relief limits the CGT rate to 10% on the sale of some rural economy you can be sure that Burgess Hodgson
‘business assets’. will ensure that our rural client’s tax affairs are
Impact on the rural economy?
Mixed. Good news for farmers looking to sell up the
whole farm or a separate business – this will likely
qualify for ‘Entrepreneurs Relief’ and be subject to the
10% CGT rate. Worse news for landowners or rural
investors – the sale of land rather than a business will
be more likely to be subject to the new higher CGT
During the election campaign the Conservatives
Farming.indd 11 7/2/11 20:34:53
At Burgess Hodgson, we understand
what it takes to help businesses grow.
If you need help to take your business
to the next level, call 01227 454627.
Farming.indd 12 7/2/11 20:35:00