The Budget 2015 – A Farmer’s Budget?

Posted On March 23, 2015 By mhauk

david missen bw

David Missen, Head of the Agriculture Sector at MHA, the national association of independent accountants, made the following observations on yesterday’s Budget: “In the run up to the Budget 2015 most commentators were predicting that there would be very little by way of new announcements, and that it would be very much a “holding action” pending more fundamental announcements after the election. On some levels this was true. There was relatively little in the headline figures of tax rates and allowances which had not been either announced in the Autumn Statement or leaked in the few days beforehand. However, the Chancellor undoubtedly managed to pull some big rabbits out of his hat – or at least the promise of emerging rabbits over the life of the next Parliament.

FARMERS’ AVERAGING

First and foremost was the very welcome announcement that, in response to lobbying by the NFU and others, the special rules for farmers averaging would be reviewed in order to extend the period over which self-employed farmers can average their profits for income tax purposes from 2 years to 5. It is a long time since a government has brought in special legislation for farmers, and it is a welcome move, particularly in this era of price volatility. There will be a consultation later in 2015 on the detail of the new relief, and it should be remembered that it still only applies to individuals and members of partnerships (i.e. not farming companies). The measure will come into effect from 6 April 2016 and be legislated for in a future Finance Bill.

PENSIONS

The second big announcement had been fairly well flagged. Pension reform has been a recurring theme of the last few years and this Budget extended it further. The good news for some is that the government believes people who have already bought an annuity should be able to enjoy the same flexibilities as those retiring from April 2015. The government will therefore change the tax rules in a future Finance Bill to take effect from April 2016, so as to allow people who are already receiving income from an annuity to sell that income to a third party. The lump sum will then be taxable as drawn, rather like a drawdown annuity. There will be a consultation over the next twelve months on how this will be achieved, and how a market in such buy-back annuities might be developed. The less welcome news is that there will be a further restriction in the lifetime pension allowance which will now be reduced to £1 million from £1.25 million. In future this limit will be index linked and, as previously, fixed and individual protection regimes will be introduced alongside the reduction which will take place from April 2016. This will affect an increasingly large number of businesses, particularly those who may have purchased farmland within a pension fund some years ago, and who may now find that the recent increases in land values will mean that their fund is now approaching this reduced limit. This probably concludes the current range of pension reforms (at least for the time being). Despite the latest reduction, a pension is still an incredibly valuable and flexible tax planning tool – both in terms of using tax relieved money to buy capital assets which can be used in the family business, and also providing a mechanism by which the older generation can build up a fund to enable them to live their later years without necessarily being wholly dependent on the farm. More morbidly, a pension is also now a very tax effective form of life insurance.

CAPITAL ALLOWANCES

Very little was announced on the subject of capital allowances beyond some minor anti avoidance provisions. The good news was that the Chancellor alluded to the current Annual Investment Allowance of £500,000 in his speech, and whilst he gave no indication that it would continue beyond December at its current generous level, he did indicate that he felt the fall-back position of £25,000 was too low (and presumably will be revised upwards at the next Budget or Autumn Statement). Those who have limited faith in politicians’ promises might like to consider making their planned capital expenditure sooner rather than later.

NATIONAL INSURANCE

The Chancellor announced his intention to abolish Class 2 NICs in the next Parliament. Given that these are a tiny and irritating monthly payment for no visible benefit, it is to be welcomed.

INHERITANCE TAX

No major changes, but a threat to the “Deed of Variation” much loved by tax planners and under threat for at least the last thirty years. A consultation is planned over the next year – in anticipation of a negative outcome, individuals should reconsider their Wills, since the traditional fall-back of “we can always do a deed of variation” might no longer apply when the time comes.

THE STING IN THE TAIL

Probably the biggest surprise was the promise that the government will abolish the annual tax return, replacing it with digital tax accounts. Preliminary notes suggest that these will import details of income from PAYE and pension providers, payers of interest and dividends, and then calculate tax liabilities which can be settled on a regular basis. It is not entirely clear how this will interact with partnership profit shares (which often cannot be determined until some time after the year end) or indeed self-employed accounts generally. HMRC’s view that accounting software will be able to interact with the digital tax account on a real time basis seems an interesting proposition, especially considering the number of businesses which still function perfectly adequately from a large red cashbook or excel spreadsheet. Having seen the teething problems which DEFRA has experienced in dealing with 130,000 Basic Payment Scheme registrations, the proposal to bring several million self-employed taxpayers into a broadly similar system seems  likely to prove challenging.”