Making Tax Digital for Farmers

Major changes are being made to the way in which all taxpayers interact with HM Revenue and Customs (HMRC). The government is referring to these changes as “Making Tax Digital” and they are proposing a staged introduction to the new rules, starting for many in April 2018.

The proposals are wide-ranging, but one of the biggest changes planned is an electronic quarterly report to HMRC of income and expenditure. For many farmers, it is difficult to see what information HMRC will glean from this – tax will still be paid on the farm’s annual profit, but this is not usually determined until after the harvest is in, rendering the quarterly reports meaningless. Coupled with this, where farms are contracted, it may not always be feasible to obtain the necessary information required to submit the reports.

Software providers will play a big part in the changes. HMRC’s current proposals suggest that invoices must be electronically scanned into software, with this software automatically uploading summarised data (not the invoices themselves) to HMRC. Very few bespoke agricultural software packages are capable of submitting information directly to HMRC at present, and so it is vital that these software providers work with HMRC, farmers and their accountants to ensure the capabilities are there. Any farmers using manual cashbooks or spreadsheets are likely to have to upgrade to meet the requirements.

Broadband is still a major issue in many rural areas. Whilst HMRC have suggested an exemption for those with no internet or computer access, it is not yet known how far these exemptions will stretch.

We have replied to HMRC’s consultations on Making Tax Digital and we are expecting further announcements to be made over the coming months and we will keep you up to date.

If you have any queries or would like to discuss this in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Agriculture team.

This article originally appeared on the blog of our member firm, Larking Gowen.

New farmers’ averaging rules

Legislation is currently being progressed through parliament to enable farmers to choose between averaging their profits over two years, five years or not at all. The rules take effect from the 2016/17 tax year.

Farmers will only be able to average their profits if they meet a volatility test, i.e. the profits for the 2016/17 tax year must be sufficiently different to those in the earlier year(s). The taxpayer must have a full two or five year trading history, so new entrants into the industry may be restricted in how they can take advantage.

The new rules are welcome news for farmers and provide an additional tool in their tax-planning armoury. The last two years have returned lower profits for many farmers and the old two year averaging rules would not have provided much opportunity for lowering the tax bill.

The addition of five year averaging, however, will allow the current harvest results to be averaged with better results over the past five years. Many farmers will be able to take advantage of this, lowering their tax liability and facilitating an income tax refund – offering a much-needed cash flow boost.

The legislation is, of course, subject to change until it receives Royal Assent, which is not expected until at least September. We do not, however, expect there to be any material changes in the rules.

If you wish to discuss how you can take advantage of the new rules to reduce your tax liability, please contact Hannah Farmborough or call on 0207 429 4147.

This article originally appeared on the blog of our member firm, Larking Gowen.

Auto Enrolment For Farmers

Tracktor - No LogosAnother topical issue for many farmers at present is Pensions Auto Enrolment. The Auto Enrolment provisions have now been in place for a few years, but for many businesses the Staging Date is calculated with reference to the number of employees within the business, so for many farmers and crofters, the Staging Date is now coming ever closer.

Under new legislation introduced by the Government, employers now have a mandatory duty to provide a pension for their employees, and to make a contribution to that pension, where the employee meets certain criteria. The Pensions Regulator has written to every employer (and kept a record of who they’ve written to) to provide them with their Staging Date. This is the date that the legislation becomes live for you as an employer. Even if you don’t think you have any employees who qualify for a pension, you will still need to be able to demonstrate this to the Regulator.

The Regulator will issue non-compliance notices and fines and it’s therefore a costly mistake to make to ignore your employer duties.

The starting point is to work out whether you have any employees for whom you have a statutory obligation to provide a pension under the new regulations. Where you have a current pension provision in place, you need to consider whether this will be adequate under the new regulations.  Where no pension provision has been in place previously, you will need to consider whether a pension is required for your employees, and then decide which of the available pension options you wish to use. You may need to engage a professional to give you the advice you need in order to make an informed decision on your future provision, and it is worth bearing in mind that there will be a cost to this, both from the business adviser, and for set up costs for the new pension.

The Pensions Regulator site has many tools to help you through your auto enrolment journey, and there are a few key areas that employers may want to pay particular attention to. In particular, postponement can be of use within the farming sector – postponement doesn’t delay your staging date, but it does mean that you can delay the assessment of your workforce for up to three months. This allows employers to ensure that the worker is going to remain employed before having to make a pension contribution, which is of particular note within the Agriculture sector where the use of seasonal workers is very common – postponement will give you the opportunity to consider your seasonal workers, and possibly make different decisions for permanent staff.

Employers should consider what pensionable salary they will use for calculating pension contributions. Qualifying earnings may be useful where the workforce’s total earnings don’t change much, as the lower earnings threshold can be deducted. However, if basic salary looks to be more cost effective due to a lot of overtime/commission/bonus, especially at harvest time, employers need to be aware that the starting minimum contribution is 3% in total (2% from the employer), with a higher end percentage contribution required by April 2019.

Don’t forget that there’s statutory communications to be sent to the workforce too. Making workers aware of auto enrolment and what their contributions will be will involve workforce engagement.

With 500,000 employers due to stage in 2016, the enquiry levels at pension providers and business advisers will increase dramatically, and you may be left to battle through this minefield alone. Use the Pensions Regulator website, speak to your payroll people and take advice where you need it, preferably well in advance of your Staging Date.

For more information about the issues raised in this article or to be put in contact with one of the members of our Agriculture team, please contact Hannah Farmborough or call on 0207 429 4147.

This article originally appeared on the blog of our member firm, Henderson Loggie.

Useful information for Vineyards and Wineries

Below are some useful links, important dates and helpful information for your vineyard or winery business. Please note that this list is not exhaustive and aims to cover the key regulatory areas of the wine industry only. The information is correct as at 17 November 2015.

Important upcoming dates

  • Notification of enrichment: 48 hours prior to commencement of operations
  • Wine de-acidification notification: 2nd day after the first operation has taken place
  • Harvest Declaration: 15 January 2016
  • Production Declaration: 15 January 2016
  • 2014/15 Personal Tax Return: 31 January 2016
  • 2014/15 tax balancing payment and 1st payment on account for 2015/16: 31 January 2016
  • Alcohol Wholesaler Registration Scheme: 31 March 2016. For more information please see our member firm, Carpenter Box’s blog on the topic from 1 October
  • Research & Development tax claim (companies only): 2 years after the company year end. See Carpenter Box’s R&D flyer for further information

Red tape

  • A guide to wine law: guidance notes on the legal requirements of the principal wine sector regulations have been published by the European Community
  • UK vineyard register data collection form: All vineyards larger than 0.1 hectares in size must be registered. Smaller vineyards must register if they operate commercially
  • Notification of enrichment: it is a statutory requirement that you notify Wine Standards in advance and in writing of the enrichment of grape must or wine
  • Wine de-acidification notification: under the Wine Regulations it is a statutory requirement that the Wine Standards is notified of the de-acidification of wine
  • Winery record: the law requires you to keep accurate records of specified winery operations for at least 5 years after bottling
  • Wine warehouse documentary checks: details of checks carried out by inspectors during visits to wine premises
  • Harvest declaration: under the Wine Regulations it is a statutory requirement that all growers make annual Harvest Declarations to Wine Standards
  • Production declaration: under the Wine Regulations it is a statutory requirement that all producers make Annual Production Returns to Wine Standards. Click here for the wine producers declaration and here for the ‘other uses’ declaration
  • Importation and movement of wine products: this guidance is for importers and shippers who are responsible for the movement or holding of wine under European regulations

Wine labelling guidance:

If you would like to discuss this issue in more detail or you would like to speak with a member of our team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.

Welcome News from HMRC for Tax Treatment of RHI

New guidance issued by HMRC on the tax treatment of Renewable Heat Incentive receipts will be welcomed by the farming community according to David Missen, Head of the Agriculture Sector at MHA.

The guidance confirms that RHI payments on a domestic scheme are tax exempt except where part of the heat is for non-domestic purposes (such as a home office or workshop used in a business). Where this is the case, the RHI receipt should be deducted from the cost of heating before apportioning any to a business use claim. If heat is supplied to a third party from a domestic installation (e.g. to a neighbour for a fee) the relevant proportion of RHI will be taxable as miscellaneous income.

Where the RHI is claimed on a non-domestic scheme the RHI payments are taxed as income. Where the heat is provided to tenants the treatment will depend on whether the heat is separately charged. If so the receipts will be “miscellaneous income” and a deduction can be claimed for any cost incurred in generating the heat. If the heating is simply included in the rent, the RHI will be deducted from the cost of providing that heating, with any surplus being taxed as property income.

The guidance is silent on exactly how the RHI is treated where the heat is used within the claimant’s business, but one would assume that it would defray the heating costs in the first instance with any surplus being charged as miscellaneous income.

Many farmers benefit from RHI payments for heating the non-domestic side of their business and David Missen commented: “This announcement from HMRC is welcome. Many of these schemes supply more than one property and this is a common sense solution to what had been an area of tax uncertainty”.

By way of reminder, where RHI is being claimed, the equipment is not eligible for the enhanced capital allowances on energy-saving plant.

Luke Morris, MHA Energy Sector Head, agreed with David commenting: “Clarification on this point of detail is welcome. More interesting, however, is the general tenor of policy coming out of this area, from a government unencumbered by coalition. We are seeing a general move to cut renewable subsidy given a £1.5bn overspend of the clean energy budget. We fully expect forthcoming tax guidance to take this in to account too, to balance the books”.

If you would like to discuss this issue in more detail or you would like to speak with a member of our team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.

Inheritance tax and farmhouses

Good news for farmers as the Upper Tribunal has upheld the First-tier Tribunal decision in the Hanson case, confirming the tax payers entitlement to relief from inheritance tax in relation to a farmhouse.

When is inheritance tax payable?

Inheritance tax (IHT) is normally payable on an estate when somebody dies – and it is sometimes payable by trusts, and on gifts made during someone’s lifetime. IHT is payable at 40% on the value of an estate which exceeds the chargeable threshold of £325,000 (in 2015/16), or at 36% if a charitable donation enables the estate to qualify for a reduced rate. There may also be an additional nil rate band of up to £175,000 available where an estate includes the home of the deceased. That applies for periods commencing on 6 April 2017.

What is Agricultural Property Relief?

Agricultural Property Relief (APR) provides relief from IHT for the agricultural value of a farmhouse which is occupied for agricultural purposes with agricultural land – subject to meeting certain conditions as to the period of occupation and ownership. (But it should be noted that APR only covers the ‘agricultural value’ of land, and farmers should be aware that there is likely to be a difference between the market value of their farmhouse and its agricultural value).

When does a farmhouse qualify for APR?

The IHT legislation states that “‘Agricultural property’ means agricultural land. This also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a ‘character appropriate to the property’.”

A farmhouse is commonly defined as ‘a dwelling for the farmer from which the farm is managed’ – meaning that farming operations or management activities must be conducted at the property for it to be a farmhouse.

When is a farmhouse of a ‘character appropriate’?

There are a number of factors to consider in determining whether a farmhouse is of a ‘character appropriate’ for an APR claim.

Points considered by the courts in this context include:

  • Whether the house is appropriate in reference to the size and area being farmed. How long has it been a farmhouse and historically linked to the land which is used for agricultural purposes.
  • Whether the land predominates so that the farmhouse is ancillary.
  • Whether an educated rural layman would regard the property as “a home with land” or a “farm”.

Must the farmhouse and the land be commonly owned?

One of the key questions which arises in the context of APR claims on farmhouses is whether the farmhouse and the agricultural property in question need to be commonly owned, or just commonly occupied, for APR purposes.

This question was most recently considered in the Hanson case. 

What happened in the Hanson Case?

In the case of HMRC v Joseph Nicholas Hanson (as Trustee of the William Hanson 1957 Settlement) [2013] UKUT 0224 (TCC) (‘the Hanson case’), the farmhouse was owned by a life interest trust of which the former working farmer was the life tenant. But by the time the life tenant died, the farmhouse was occupied by his son – who also ran the farming operation on the property which he personally owned.

HMRC argued that on his death, APR was not due on the farmhouse (which, as the life tenant, formed part of his estate) because there had to be common ownership of the farmhouse and the agricultural land by which the character of the farmhouse is judged.

In this case, the taxpayer – who was both the trustee of the interest in possession trust and the life tenant’s son – who occupied the farmhouse and ran the farm – argued that the character of the farmhouse can be judged by reference to the land if both the land and the farmhouse are in common occupation, as they were here.

The Upper Tribunal agreed with the First-tier Tribunal decision that common occupation was all that was required to establish an APR claim. They noted that: “a single farming unit is likely (at least it is not easy to envisage a case where this is not so) to be in a single occupation. That is why occupation can be taken as a reliable touchstone for identifying ‘the property’.”

What action should farmers take now?

Farmers should take this opportunity to review the current ownership and occupation structure of their farmhouses and agricultural land to ensure that their potential APR claims are best protected in accordance with current APR law. In particular, (i) it is critical to ensure that occupation is tied into the agricultural activity, and (ii) contemporaneous evidence should be retained to support any future APR claim.

If you would like to discuss this issue in more detail or you would like to speak with a member of our team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.

 

Succession planning for farmers

Succession planning can be a thorny issue and many farmers haven’t thought through what will happen to their farm once they die, as they assume the family will carry on.

However, this might be a disastrous assumption. Will their heirs willingly take over or have they already flown the nest and pursued other careers? Does the farmer have an exit plan in place or are they working for as many years as possible and hoping for the best?

According to DEFRA statistics, in 2013 the average age of a farm owner is over 65, implying that succession planning isn’t as straightforward as it once might have been.

So what can farmers do now to secure their future?

If there is no business plan in place then that’s probably a good place to start. Once you have identified where the business is now and where you want it to go in the future, a succession plan will be much easier to create. Be clear on roles, responsibilities and objectives and ensure that the farm is owned in the most tax efficient business structure for your unique needs. Farms and their businesses have often grown in an ad-hoc way over the years and it is unclear where the ownership lies. Just like the owners of any business, a farmer needs to think about their exit route and put plans in place many years before they are ready to retire to ensure that all runs smoothly.

Careful planning and advice will ensure farmers can maximise the tax reliefs available to them and pass their business on to the next generation in the most tax efficient manner possible. Over a generation, a 1,000 acre farm might pay £1m in income tax. If the taxpayer gets it wrong, the inheritance tax bill could be nearer to £4m – with a likely Capital Gains Tax charge on top. With examples like this, it’s not difficult to see the importance of careful planning.

The key is to think between five and ten years in advance and that the retiring generation have adequate provision.

Other issues that could be considered include:

  • Incorporation – should you operate as a Partnership or a Limited Company or even as a mixture to get the best of both?
  • Annual Investment Allowance – have you correctly planned your capital expenditure?
  • Agricultural Property Relief -does your current structure guarantee Agricultural Property Relief?

If you would like to discuss this issue in more detail or you would like to speak with a member of our team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.