Your Federal Quarterly Tax Payments are due April 15th Get Help Now >>

Farming by pengxiang


      Chartered Accountants

     Who will you
     hand over to?

     Will you pass the
     fingernail test?

     Save tax on
     new ventures

     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!

       We are a leading firm of chartered accountants and                                               Camburgh House
       business advisers, specialising in personal and corpo-
       rate tax planning. Our experienced professionals have a                                       27 New Dover Road
       strong reputation for providing quality technical advice                                             Canterbury
       and the ability to implement practical financial solutions
       as flexibly as our clients demand.
                                                                                                              CT1 3DN

       Building relationships has always been at the heart                                              T: 01227 454627
       of our business. We understand business success is
       measured by the strength of our client relationships.Our
                                                                     BURGESS                            F: 01227 452967
       partners’ technical skills, professionalism and business
       acumen is complemented by our staff’s commitment to
       provide our clients with the best service possible.           Chartered Accountants

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
      tion.                                                                million).
        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
                                                                                                    CONTRACT FARMING

     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-
                                                                      ing practices
          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-
        ments are:

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
                                                                 SUCCESSION PLANNING


     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
     tax investigations.”

     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
                  TAX CHANGES

     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
                                                                                                   TAX CHANGES
        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
                                                                   managed efficiently.
        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

                     Inheritance Tax
        During the election campaign the Conservatives

Farming.indd 11                                                                                                           7/2/11 20:34:53
                  Helping your
                  business grow

     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

To top