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Rural Intelligence

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Farms & Estates SPRING 2022

Introduction Welcome to Albert Goodman’s agricultural newsletter. There is a lot going on in farming at the moment. DEFRA are, at last, producing some detail to the high-level plans that they have already published. This is good news as farmers are beginning to be able to plan for the demise of the BPS and changes in the way support to the industry are structured. In addition, there are cost pressures on different parts of the industry. Inflation through the country has a headline figure of 5.5% this month, which is the highest for many years. This does not reflect the increase in costs on many farms. Feed, fertiliser, labour and fuel are major costs to farms and estates. Whilst every business is different, it appears to me that real ‘on-farm’ inflation is much higher and for many will reach double digits this year. Many economists are predicting inflation to be a brief rise and fall. However, my concern is that this inflation will be driven on for many months. This could result in the Bank of England having to take remedial action by increasing base rates well beyond the 2% predicted level and for longer. Now, more than ever, it pays to understand your business cash flow and efficiencies and I hope the following articles help that process.

Iain McVicar PARTNER AND HEAD OF FARMS & ESTATES TEAM

INTEREST RATES IMPACT

Given the recent rise in the Bank of England base rate. It is important to revisit how changes in interest rates will affect your business. To put the current market into context 33 years ago, the Bank of England base rate was 13.875%. 30 years before that the base rate was 4% not too different to 14 years ago. Ultimately, the global economy works in a cycle. I would not be surprised if within my working lifetime I see interest rates of 10% or above. Every business is exposed to interest rate changes differently. It is therefore important to consider the cash flow impact of any change to rates and how it affects your ability to repay your debts. To consider a practical example, if a business has £1m of borrowing over 25 years on a variable basis at 2.5% + base, then the impact of base rates increasing are:

Monthly repayment

Current (0.25%)

Increase to 0.5%

Increase to 1%

Increase to 2%

Increase to 4%

£4,613

£4,742

£5,006

£5,558

£6,752

At an increase to 4%, the monthly cost of the loan would increase by just over £2,100 (£25.6k a year). For every business the financial impact of this change is different. For some businesses this could mean the end and for others it could mean no sunny holiday. It is important you understand how changes impact on your business and whether it is worth mitigating your risk by fixing some or all your loans.

TOM STONE Farms & Estates Team tom.stone@albertgoodman.co.uk

THE ROAD TO NET ZERO – THE FINANCIAL IMPACT It is a fact that, in England, direct payments are reducing and, in their place, will be a land management funding model with environmental conditions. This will result in land-based businesses receiving less funding overall unless businesses look to new income streams and embrace the road to net-zero. WHY IT’S IMPORTANT TO ENGAGE AND PLAN NOW Government policy on climate, agriculture, environment, food and trade is increasingly environmentally driven. Large corporates are already engaging in this path mandatory sustainability reporting in financial statements is currently required for large organisations. Smaller entities can make the most of exemptions from carbon reporting, at present. However, the knock on impact will flow through to smaller entities with changes in stakeholder choice - questions which may be asked by those with whom producers sell to, the supply chains, and this will ultimately influence choice of supply and product price. Businesses which engage and plan early will be ready to benefit from conditional funding and the opportunities of consumer choice and premium price, differentiating themselves from others and the rest of the world who can produce food cheaper than we can. HOW TO ENGAGE NOW AND PLAN NOW At Albert Goodman we made the bold decision to commit to becoming genuinely net zero by 2030. We have already started to measure our carbon footprint and are planning how we reduce this as part of our strategy. We are also supporting our clients with their own sustainability journeys, those required to report their carbon footprint, as well as those voluntarily wishing to carry out environmental and social governance reviews. For those starting on this journey gathering the data and measuring the carbon footprint is the first step. With this data businesses can consider the changes required and how this impacts financially and allows them to be forearmed with suppliers and stakeholders ready to take on opportunities.

THE FINANCIAL OPPORTUNITIES AND THREATS We are seeing a growing number of clients presented with opportunities to enter contracts for biodiversity net gain and nutrient neutrality, enabling development on land in ownership, or on land owned by others who offer financial rewards, as well as carbon sequestration land use change opportunities. Landowners monetising natural capital assets through government schemes or private investment need to consider the tax impact. CLA are working hard lobbying government for changes to tax legislation to provide clarity and to ensure tax is not a barrier to government achieving their policy aims. Working with the current tax legislation, and with no one government scheme or private contract the same, the tax treatment relies heavily on the precise wording and nature of the contract. Careful consideration needs to be given to how the payment(s) received will be taxed as well as the long term impact on the taxation of the land for capital gains tax (CGT) and inheritance tax (IHT) purposes. Please see article on the tax impact in our Spring 2021 newsletter CONCLUSION Whilst there are likely to be huge opportunities for landowners there will be costs if businesses do not engage early - the worlds drive to net zero would become a threat to the business. To be sustainable into the future businesses need to ensure this subject is on the agenda and part of the strategy.

SAM KIRKHAM Farms & Estates Team sam.kirkham@albertgoodman.co.uk

Does the BPS lump sum stack up? PART TWO Following the release of the guidance on the BPS lump sum, we have a confirmed guide for how the lump sum will be calculated. The lump sum payment will be calculated at 2.35 times of the average BPS payment in 2019, 2020 and 2021. It will however be capped at £99,875, so for farms bigger than around 450 acres they will be capped at the £99,875 level. The rules to qualify for the lump sum are that the farmer is required to retire from farming, surrender their BPS entitlements and either sell, gift, or lease their farmland on a minimum five year FBT. Based on the proposals we can compare the estimated lump sum to the entitlements that might be paid until 2027, depending on the size of the farm as follows: 100 acre farm

200 acre farm

300 acre farm

400 acre farm

500 acre farm

600 acre farm

Estimated lump sum payment

22,212

44,424

66,635

88,847

99,875

Estimated payment for 2022 - 2027

25,455

50,909

76,364

101,819

127,274

152,728

As you can see above, for the larger farms the scheme looks like a no go, unless there is a need for upfront cash now. However, for those smaller farms with little or no succession then the prospect of receiving a lump sum could be an attractive retirement bonus. The government intend to introduce legislation to provide clarity that the Lump Sum Exit Scheme payments will be treated as capital in nature and will be subject to capital gains tax, or corporation tax in the case of incorporated entities. The existing capital gains reliefs will be available where the qualifying criteria are met. This adjustment to the tax could provide some added incentive to the scheme as it is likely that a cessation in farming would mean that the claimant could claim business asset disposal relief and therefore the tax due on the lump sum would be 10% not 20-42%.

TOM STONE Farms & Estates Team tom.stone@albertgoodman.co.uk

MILK VENDING MACHINES - A DETAILED CONSIDERATION

Are you a dairy farm looking for an extension of your own business rather than a completely diversified enterprise? Are you considering direct sales? Still the sale of milk but to a completely new customer base - the consumer. Although in many senses it is turning the clock back to supplying milk directly from the farm to the local community this time it is using technology to offer fresh milk, direct to the consumer 24/7 with the provenance many desire today. A milk vending machine can help you connect more with your local community and create some positive PR for the dairy industry which has taken a bit of a hammering over recent years. This article will look at how to approach such a diversification, considering research, business plan, returns and on going commitments. Although we are focusing on Milk Vending Machines these titles can be used when considering any type of diversification.

Research Research is incredibly valuable - positive and negative feedback should be considered. Your milk contract is crystal clear what your customer wants - the conditions are listed, and you are rewarded or penalised when marked against the desired criteria, whether it be on constituents, volume, temperature, contamination levels etc. However, you now need to gain an understanding of what your new potential customer

wants. Just as it is important to meet the criteria of your milk contract it is important to meet the desire of your consumers from the vending machine to ensure you retain that customer. As this is unlikely to be your main revenue stream it is important to check your contract and contact your milk buyer to ensure that such private sales are not prohibited. You core business is likely to remain unchanged and therefore maximising your milk price here is still likely to provide you with the best returns. It is important that, despite investing in the vending machine, you do not lose focus of your main contract. Knocking on doors, running Facebook campaigns, or asking local community groups can all be great ways of understanding the demand a little more. It is at this point that you should consider what your offering will look like. The milk, is it raw milk or pasteurised milk? Although raw milk certainly offers a unique selling point (USP), and will save the investment that pasteurising requires, you may be restricted depending upon your TB status and the potential location of your vending machine. Also, are you hoping to offer milk, milkshakes, and coffee? Are there going to be other products on sale as well? Where would be a suitable location?

Plan Often the ideal of putting plans down on paper is dismissed by many farmers, unless it is the back of an old envelope. Writing up your plans can be helpful, allowing everyone to see your vision and help it become a shared vision. It also, ensures you are focused on the goals, and it may be required if you require external funding for the capital. Similar to funding any other on farm development you will also need planning permission from your local council and support of your local Environmental Health Department. Although plans should remain flexible, and able to evolve, when considering the critical factors such location of the machine, customer parking and your milk handling facilities, ensure you plan for future growth - always allowing more space for capacity should it be needed. The location ideally needs to be convenient for both you and the end consumer, with good access, electricity, water and potential security. For some this is not possible, and they will be required to locate it further away from the farm creating less efficiency but this may be a good compromise if it leads to a much greater customer base resolve, such as near retail sites, commuter routes, public spaces, pubs etc. In order to develop a good relationship, you need to do as you say you will and problems quickly. Communications need to be clear, whether this be opening times, instructions for use or communicating short comings. You

need to be a reliable source of milk, including some cows being in milk all year round. For example an autumn block calving, without planning, is unlikely to be able to supply milk to the machine for school summer holidays which is a fabulous time to lock in your customer base. Finally, who is going to be responsible for it? This will help determine the business structure. Although it is an extension of the current farming business it may be sensible to have it trading as a separate entity. Again, check with your milk contact, and your insurance provider, but a separate structure ensures that the finances are clear cut and may empower the person responsible.

Return Although such diversification may increase your connection with the local community most will be considering it to improve overall farm profitability by selling milk for £1+/ litre rather than 33ppl on your milks contract. The research should provide you with a rough ceiling price remembering that this is the freshest, high quality and provenance milk available so don’t undersell yourself. Experience should also be factored in. To calculate your possible return, you should consider the potential upfront costs remembering the vending machine is not the only investment. Assuming you are not selling raw milk then the pasteuriser and cooling tank can be a similar investment.

Illustrative capital outlay: Vending machine (based on 200L vending machine with 2 x 100L tanks)

£12,500

Pasteuriser (based on 300L pasteuriser and cooling tank)

£12,500

Physical setting, branding, marketing initially

£5,000

Additional capital within 10 years

£5,000

Total outlay

£35,000

The above is for illustrative purposes, ignoring the various options available for various supplies and milk shake offerings. However, milkshakes as a concept should most certainly not be ignored. 50ml of milkshake syrup costs around 20ppl compared with milkshakes (330ml to 400ml) being retailed for £1.15 - £1.50. Although we are very familiar with the honesty box approach for milk shakes it can create a better margin and experience if they are sold ready mixed as the final product. Milk shakes are a great way, in the right location, to significantly increase frequency and volume purchased.

Now to put some of these figures into action! Price per unit

150L/day

50L/day

Income Milk

£1/litre

54,750

18,250

Syrup – est. 50% sales

50p/50ml

13,690

4,560

Bottles – est. 15% sales

£1.50/bottle incl VAT (£1.25 net)*

10,270

3,420

£78,710

£26,230

16,420

5,480

Total annual income

Expenses Milk – estimated CoP

30ppl

Syrup – est. 50% sales

20p/50ml

5,480

1,830

Bottles – est. 15% sales

40p/bottle + writing 40p/bottle

6,570

2,190

Cleaning

Estimate £25+/month

300

Machine maintenance

Estimate £500/quarter

2,000

Total annual cost

£30,770

£11,800

Margin

£47,940

£14,430

10,950

3,500

£33,490

£(20)

Other Costs Staff cost

£15/hr for 2hrx 365 day

Capital cost

£35k over 10 years

Potential profit

*VAT quirk – a bottle sold with milk in it is zero rated for VAT but a bottle sold empty is standard rated The above shows that you could make a return on your investment within the first 12 months. Or, you could continue to do it for 10 years and just about make it pay for itself by which point it would be scrap value. It all depends on the popularity and consistency of the sales and this also assumes that anything unsold is returned to the tank as there is no wastage included!

Closing remarks Don’t get sucked in by the potential profits available. Done badly or in the wrong location the time outlay and capital costs remain the same but the reward is reduced – it is not a ‘money for nothing’ scheme. Also, profits aside, do not underestimate the emotional drain in keeping the public happy every day and how personally you may take it if they are unforgiving – which some will be! The maintenance and upkeep of the machine both technically, hygiene but also aesthetically needs to be consistent. The key is public perception and social media will be instrumental in this – you really have to have the time, know-how and desire to consistently push the messages out there. They can be really exciting and should you wish to discuss this idea of diversification or any other ideas and how best to approach it then please do get in touch.

KATE BELL Farms & Estates Team kate.bell@albertgoodman.co.uk

Return on Investment on Furnished Holiday Lets WHAT IS A FURNISHED HOLIDAY LET?

POTENTIAL RETURN ON INVESTMENT (ROI)

A Furnished Holiday Let (FHL) is a commercially let property (so your intention is to make a profit) which is furnished – this means, according to HMRC’s definition, there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture.

The level of financial return on any property will vary considerably depending on your circumstances. If you have a cottage which was previously let to a farm worker or tenant then you may only have to pay for some repairs and furnish the property which is considerably less investment required then building from scratch, purchasing new or renovating an old barn.

FHL have 3 annual occupancy tests to pass 1. The pattern if occupation condition - if the total of all lettings that exceed 31 continuous days is more than 155 days during the year then the property is not a FHL. 2. The availability condition - the property must be available for letting for at least 210 days in the year 3. The letting condition - the property must be let to the public for at least 105 days in the year (so this does not include days when friends or family are occupying the property at a reduced rate or where there is no charge).

During peak seasons a holiday let could yield up to 30% more than a buy-to-let property but due to most FHL being let on average for 20-24 weeks in a year this balances out to deliver an 8% annual return compared with 6% for a buy-to-let property.

TAX IMPLICATIONS A FHL much like an assured shorthold tenancy (AST) is subject to income tax at 20%, 40% or 45% depending on levels of other income. Certain expenses will be deductible such as repairs, letting fees, business rates and electricity. Unlike an AST

property improvement maybe deductible as capital allowances. VAT treatment is another area where a FHL differs considerably from an AST. Rental income from a FHL is a standard-rated supply for VAT with AST income being an exempt supply. Effectively, if the property is let within the VAT registered farming business, then any input VAT on any expenses or purchases relating to the FHL can be reclaimed. The downside is that Output VAT will be chargeable on the rental income, this is currently reduced to 12.5% but set to return to 20% from 1st April 2022. If the FHL business is run separately to the farming business and assuming the new FHL business is not VAT registered and does not reach the annual VAT turnover threshold of £85,000 then output VAT would not need to be charged to your customers. The downside is you won’t be able to reclaim any of the input VAT on repairs/ other expenses. If the FHL remains a farming business asset and the farm is still predominantly a trading business, and the

property is an asset of the business then the property could qualify for Business Property Relief under the current rules and would not be subject to Inheritance Tax. If it’s stripped out from the trading business or leads to the farming business, no longer being predominantly a trading business then this could lead to IHT being chargeable upon death.

CHARLIE GREEN Farms & Estates Team charlie.green@albertgoodman.co.uk

RISING INPUT COSTS - how will this impact my dairy margin?

A hot topic within any agriculture conversation includes the rocketing prices we have experienced for key input costs within all farming sectors. The main costs which have been impacted are feed, fertiliser, fuel and labour. Like most things, once one cost increases, this has a knock-on effect on others the increase in fertiliser cost pushes up the cost of feed prices, which then, as time goes on, puts pressure on buyers to increase commodity prices (we hope!).

For the dairy industry feed and forage input is by far the largest cost. Therefore, any change in feed price will impact the bottom line with some significance. Undoubtedly, over the last 12 months farmers have suffered numerous price rises with feed and fertiliser being at the forefront. This has been softened slightly by the numerous milk price increases currently being seen in the sector. But we are still left questioning where this will leave our margin? Therefore, comparing your increase in milk price, to your increased input costs should be at the forefront of understanding your current profitability. This will then help you understand if your margin is being squeezed, stable or even improved. An averaged benchmarked dairy farm producing 8,000 litres per head would have a concentrate cost of 8.3 pence per litre (based on £255 per tonne @ 2.6 tonnes per head per year). If we then increase the concentrate cost by 1.0 pence to 9.3 pence per litre, the price per tonne would need to increase by 12%. Therefore every £31 per tonne increase in concentrate cost would need to see a 1.0 pence per litre (ppl) milk price increase to balance the margin. AHDB reported the average feed price from September 2020 to September 2021 has increased by £29 from £237, an increase of 12%. Although concentrates are one factor that will push up feed costs, fertiliser and fuel will also push up the cost of forage. The fertiliser and fuel increase for 2022 has been estimated at 1.5-2 pence per litre. This does not include any increase in labour cost which will inevitably increase with the national living wage set to go up in April by 6.6%.

The below table is an estimate of how a dairy farm costs could look over the next 12 months: Input

Estimate increase in cost – Pence per litre (ppl)

Concentrate feed

1.0

Fertiliser and Fuel

2.0

Labour

1.5

Other

1.0

Total estimated increase in costs

5.5

The Milk for Cheese Value Equivalent (MCVE) in November 2021 was 39.2ppl which compares to 31.6ppl in the 12 months prior, an increase of 7.6 pence per litre. Our estimated total dairy farm costs have increased by 5.5 pence per litre. Assuming that the MCVE price increase is passed onto farmers, which it appears to be, then the milk price increase should be enough to cover the extra costs incurred. It will be interesting to see the actual financial figures once the 2022 year end accounts start to land with us in April/May. We will then start to understand the actual impact on the sector and how margins compare to the previous year, with a clearer idea of what the next 12 months may bring.

ROSIE TURNER Farms & Estates Team rosie.turner@albertgoodman.co.uk

CORPORATION TAX RATES CHANGES

FROM THE 1ST OF APRIL 2023 THE MAIN RATE OF CORPORATION TAX WILL BE INCREASING FROM 19% TO 25% ON TAXABLE PROFITS. However, a small profits rate (SPR) will be introduced for companies with a taxable of profits of under £50k. These companies will continue to pay Corporation tax at the current rate of 19%. Companies with profits between £50k & £250k will pay tax at the main rate of 25% reduced by a marginal relief. The first £50k of these profits will continue to be charged at 19%, any profits between £50k and £250k will effectively be charged at a rate of 26.5%. For example, if a company has profits £150k, this would result in tax payable of £36k, an effective rate of 24%, as demonstrated by the table below. This compared to a tax liability of £28.5k using the current rules (19%). Profits (£)

Tax rate (%)

Tax payable (£)

£50k

19.0%

£9,500

£100k

26.5%

£26,500

Total: £150k

24.0%

£36,000

For companies whose profits exceed £250k, all these profits will be charged at 25% with no marginal relief. If your accounting period spans the 1st April 2023 new rate start date, profits before this date will continue to be charged at 19% and any profits after this date will then be charged under the new rules. The limits will also be prorated if the accounting period is shorter than the usual 12 months. Depending on your profit levels it may be beneficial to look at your year end tax planning. For example, if your company profits were between £50k and £250k, and you are paid a national insurance efficient salary from your company it may be worth considering increasing your salary to that of the personal allowance, meaning you are only being charged tax at 12% instead of 26.5%. Alternatively, if possible you may be able to increase a rental charge from the company to you to maximise your basic rate band, meaning profits would effectively be taxed at 20% not the 26.5%. Until the 31st March 2023 you will be able to reduce your corporation tax bill by investing in qualifying plant and machinery and special rate assets. Companies will benefit from a 130% first-year capital allowance on plant and machinery and 50% first year allowance on qualifying special rate assets.

THE EFFECT ON GROUP & ASSOCIATED COMPANIES: A company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months: One company has control of the other Both companies are under the control of the same person or group of persons. For example, those with holding companies owning the property and a trading subsidiary company will fall under the first bullet point. A shareholder owning more than 50% of two or more companies will bring their companies under the second bullet point. The lower and upper corporation tax limits will be proportionately reduced where there are associated companies. The limits will be divided equally between each associated company as shown in the table below: Associated companies

Upper profits limit

Lower profits limit

£250,000

£50,000

£125,000

£25,000

£83,333

£16,667

£62,500

£12,500

For example, if the company in the previous example had one other associated company, its profit limits would be halved to £125k & £25k. As the profit was £150k, this exceeds the upper limit and all the £150k of profits would be charged at the new main rate of 25% resulting in a Corporation tax charge of £37,500. Therefore, additional corporation tax each year of £1,500 will be payable If the other associated company had profits below £25k it would be beneficial to move profits from company 1 to company 2 so these profits are charged at 19% not 25%. As we approach the new rules and higher corporate rates, consideration should be given to year end tax planning and any planning which can be put in place to minimise the impact of the associated company rules.

ALEX WESTCOTT Farms & Estates Team alex.westcott@albertgoodman.co.uk

TAX-FREE GIFTS? Making a gift to family member, or even friends, while you’re still alive is a good way to both help your loved ones at a time when they need it and help reduce your estate for inheritance tax (IHT) purposes. What and how much you decide to gift is up to you but, to ensure its taxfree is important. For IHT purposes, when a gift is made it’s called a potentially exempt transfer’ (PET). Basically, if you survive more than seven years after you make the gift, then there won’t be any IHT due on death. However, if you die within seven years, the failed PET becomes chargeable and is added to the value of your estate on death. If the combined value of your estate is over your available nil rate band (currently £325k), IHT may be due.

It’s worth noting that the IHT due on a failed PET is payable by the recipient of the gift.

Gifts that are given between 3 – 7 years before death do receive some relief and are taxed on a sliding scale, called taper relief, but only after deducting the NRB.

It is therefore better to make PETS as early as possible, to obtain full exemption, particularly where those assets aren’t going to qualify for any IHT reliefs. Considering the above, it might be worth considering life assurance to meet any liability on a potential failed PET. It is important to note you cannot continue to benefit from the gift after you give it away. So, if you continue to live in your house rent-free, after gifting it to your child, then this would still be regarded as part of your estate and subject to IHT. This is known as a gift with reservation of benefit (GWROB).

GIFTS YOU CAN MAKE TAX-FREE Everyone has an annual gift allowance (annual exemption from IHT) of £3,000. Any unused annual exemption may be carried forward for one tax year only Any number of small gifts can be made up to £250 per person Wedding or civil ceremony gifts, if made before the wedding and on the basis the wedding goes ahead £5,000 or less if given to a child £2,500 or less, if given to a grandchild or great-grandchild £1,000 or less, if given to another relative or friend Gifts to your spouse or civil partner Gifts from your own surplus income Gifts to registered UK charities and political parties These exemptions are per individual, so a couple could potentially make a joint cash gift to their daughter on her wedding of up to £22,000 tax-free, on the basis they had not utilised their annual exemption for this year and the previous tax year.

However, a gift is treated as a chargeable disposal for capital gains tax (CGT) purposes. The gift is treated as if it were a disposal at full market value at the date of gift and, unless the gift is made in cash or another exemption or relief can be claimed, CGT is chargeable. Although everyone has an annual CGT exemption (currently (£12,300), basic rate taxpayers will pay 18% on gains from the disposal of residential property and 10% on most other assets, whereas higher rate taxpayers will pay 28% on residential gains and 20% on any other assets. While reliefs, such as gift relief may be available, if it qualifies as a business asset or is occupied for the purpose of agriculture, considering the potential tax implications, is important to make sure the CGT position is considered. If the gift doesn’t qualify for CGT gift relief, if there are no IHT implications, an alternative could be to make the gift via a trust. Gifting to trust allows CGT gift relief to be available. Considering timing, and the life expectancy of the person making the gift, it may be more advantageous to make the gift into trust on death instead. While this would be IHT neutral, the base cost of the gift would obtain a CGT uplift on death, and no CGT would be payable. As you can see, the timing of making any gifts and the tax implications should be carefully thought through. For that reason, please contact us if you are either intending on making a gift or are concerned about your IHT exposure.

KATE HARDY Farms & Estates Team kate.hardy@albertgoodman.co.uk

Hire purchase VS leasing Whether you are looking to invest in a new combine, telehandler or other machinery, a key issue is figuring out how best to finance it. You may be fortunate enough to have the cash to purchase the asset outright, but if not, you are likely to reach for a hire purchase or lease.

LEASES There are two main types of leases that you could enter: operating leases or finance leases.

Operating leases If you enter an operating lease, you will effectively be renting the asset over an agreed period. The lease payments are tax deductible and any VAT on each payment is reclaimable. In many cases the finance company will be responsible for insuring and repairing the asset. The downside is this type of lease is likely to be more expensive in the long run as the monthly repayments are generally higher than a finance lease or hire purchase.

Finance lease A key difference is a finance leased asset will be recognised on the balance sheet as well as the lease liability. The additional benefit of this is that the depreciation charged on the asset recognised is allowable for tax purposes. The finance payments are also tax deductible and any VAT attached to these are reclaimed on each payment. The business will however be liable for insuring and maintaining the asset themselves. At the end of the lease agreement the business will not own the asset but could still use the asset going forward at reduced monthly payments. Otherwise the asset will need returning to the finance company. No capital allowances can be claimed for assets on finance leases.

HIRE PURCHASE (HP) With a HP, the business will own the asset at the end of agreement. There is normally a small option to purchase fee at the end of the repayment period but then the asset is completely owned by the business. The repayments are not tax deductible and won’t be shown in the profit and loss account. Like a finance lease it will be the business’ responsibility to maintain and insure the asset. The depreciation of the asset is not tax allowable either, but it isn’t all doom and gloom as, in the year of the asset being purchased, it is likely to qualify for capital allowances. This does mean that if the business manages to sell the asset later the proceeds will be taxable income too. This shows tax relief is received earlier with a lease. At the initial purchase date all the VAT for the asset on hire purchase is immediately reclaimable rather than having to claw this back month by month over a finance lease so this can have an additional cash flow benefit.

Operating leases

Finance leases

Hire purchases

Tax allowable repayments

Repayments are not tax allowable

VAT claimed on repayments

All VAT is claimed at invoice date

Only have access to asset for short Have access to asset for most of Own asset so have control over asset period of its useful life useful life for its entire life. Not owned at end of lease and will The business owns the asset. need returning to finance company.

Never own the asset Not liable for maintenance

its

insurance

or Liable for insuring and maintaining Liable for insuring and maintenance of asset asset

Asset not recognised on the balance Depreciation is a tax allowable cost Deprecation is not a tax allowable sheet, so it is not depreciated. for the asset cost No capital allowances are claimable.

No capital allowances are claimable

Capital allowances as tax deductions are likely to be claimable in the year of purchase.

To be help you decide the type of agreement which is right for the business you should focus on what the long-term benefits of owning the asset are against the cash flow effect and the tax relief. To do this you should obtain all the deals from the supplier, consider how long you will keep the item and what it might be worth when you sell it. We can then calculate the cost of each financing option for you as well as the cash flow impact.

ZOE ARMITAGE Farms & Estates Team zoe.armitage@albertgoodman.co.uk

VAT REGISTERED BUSINESSES NOT ALREADY “MAKING TAX DIGITAL” COMPLIANT NEED TO PREPARE FOR CHANGES NEXT YEAR WHAT IS MAKING TAX DIGITAL FOR VAT? VAT registered businesses with a taxable turnover above the VAT registration threshold currently have to keep certain digital records and must file their VAT returns directly from these digital systems. This is referred to as Making Tax Digital for VAT or MTD. The digital record system can be a software programme on a computer or an app on a tablet or smartphone. Whichever system is used it must record certain information. This includes, in relation to income, the date supplies were made, their value and the rate of VAT charged. Similarly for expenses the date of the supply, the value and the amount of VAT to be reclaimed has to be recorded. There are specific MTD requirements for certain types of businesses including retailers or businesses using Margin Schemes. MTD does not remove the requirement to keep and preserve records specific to those schemes but it does specify which records must be kept digitally. If information required by MTD is kept in different software systems or programmes the transfer of data into the system used to calculate and submit the VAT return values has to be made using a digital link and not manually. Some records can be kept outside of the MTD software and adjustments made manually, including Partial Exemption and Retail Scheme annual adjustments. Businesses required to use MTD have to submit their VAT returns to HMRC directly from their software and not enter the figures manually into the HMRC system. At present HMRC only receives the values of the nine boxes of a VAT return, not the detail of how these have been calculated.

HMRC may grant exemption if they are satisfied MTD is not practical, the examples they give are due to age, disability or location or it is run entirely by practising members of a religious society (or order) whose beliefs are incompatible with using electronic communications or keeping electronic records.

ACTION REQUIRED Businesses that are not MTD compliant need to consider how to prepare for MTD sooner rather than later. Those registered for VAT on a voluntary basis could deregister although this may not be without a cost. In some circumstances deregistering will trigger a VAT charge on stocks and assets that are on hand when the VAT registration is cancelled. In agricultural businesses which tend to own relatively high value machinery an exit charge is quite likely. The implications of deregistering do need to be carefully considered. For businesses that wish to, or must, remain VAT registered and who are not eligible for exemption there are a number of options. Most off the shelf accounting packages are MTD compliant. If records are kept on spreadsheets bridging software is available to link the spreadsheet to the HMRC systems. If you would like Albert Goodman to review your processes speak to your normal contact at Albert Goodman or email richard.taylor@albertgoodman.co.uk, we would be happy to assist.

WHAT IS CHANGING From April 2022 MTD for VAT is being extended to all VAT registered businesses. The change will apply from the first VAT return period beginning on or after 1 April 2022.

RICHARD TAYLOR VAT Team richard.taylor@albertgoodman.co.uk

XERO TOP TIPS - YEAR END PROCESSES With many year ends fast approaching or having just recently passed below is a, useful checklist of processes to complete before letting us know that your accounts are ready to be prepared.

The Bank – please ensure that all transactions are reconciled for the year and that the “Bank Reconciliation” report agrees to your physical (or online) bank statements. (Also, please continue to reconcile post year end transactions as we will look at this too when preparing your accounts.)

2. 3.

VAT Return – Please make sure that you have submitted your VAT return for the period that covers your year end.

Mis-postings & Duplicates – By running the “Account Transactions” report you can check all the postings you’ve made in Xero in the year and this will allow you to pick up on any mis-postings of transactions or any duplicates with bills and spend moneys.

Debtors (amounts owed to you) – Please check, by running the report called “Aged Receivables Detail”, that Xero has all amounts that are owed to you at your year end included as invoices. These will be amounts that are due to you from a sales invoice dated before your year end that you didn’t receive until after your year end.

Creditors (amounts you owe to suppliers) –This is the opposite of debtors. The report you need to run this time is the “Aged Payables Detail”. Please ensure that all bills that are dated within your year end but that you haven’t paid until after your year end are included here.

Uploading PDFs/ pictures of bills/ invoices – Uploading PDFs or pictures to transactions is a great tool that will not only mean that you may not need to drop off a big box of records to us but also may save time when trying to find a document several months later. You can use this function on bills, invoices, or receive/ spend money transactions (click on the “Add Details” button on the reconcile screen) just look out for this little button at the top . An alternative to this is to use Hubdoc – which is free with a Standard subscription of Xero! My last two points are more general to the year end process and not necessarily Xero tips.

Notes/ summaries – Please feel free to provide some notes or bullet points either in a letter, email or a phone call to just summarise any major changes or to point out anything odd that has occurred in the year.

Stock sheets – We aim to get stock sheets out to you as close to your year end as possible. Alternatively, write all your stock down/ record it any way you prefer to as close to your year end as possible.

NOTE: Making Tax Digital (MTD) will become compulsory for ALL VAT-registered traders from April 2022 so don’t leave it to the last minute to do something about this if you don’t already comply.

CHARLIE GREEN Farms & Estates Team charlie.green@albertgoodman.co.uk

WHAT HAPPENS TO MY PERSONAL PENSION POT

upon my death? A common misconception with pensions is that they cease to exist on death. However, when you die, your personal pension scheme could provide benefits to your financial dependents or your estate. These are known as death benefits. Exactly what benefits your dependents or nominees will receive when you pass away will depend on the type of pension scheme that you have. However, this article is going to focus on the death benefits applicable to Money Purchase pensions. A money purchase scheme (also known as defined contribution) is a scheme where the final value depends on the amount of contributions made by the member, their employer and any third party. the performance of the investments underlying the scheme.

Death benefit options When an individual dies with funds in a money purchase pension scheme, the trustees or scheme administrators will normally have discretion over who receives death benefits. It is always sensible for a member to complete a nomination form, as this will give the trustees guidance on who you wanted to benefit from the residual pension. There is a range of ways in which death benefits can be provided for beneficiaries. The choice is not necessarily all or nothing - the same pension pot may provide benefits in different ways. These include: lump sum income drawdown lifetime annuity dependant’s scheme pension Whilst legislation dictates the options that are available, the options for individuals may be limited by the scheme rules. For example, not all schemes can facilitate income drawdown and very few defined contribution schemes would allow a dependant’s scheme pension. Therefore, it

is extremely important to ensure your pension offers the death benefit flexibility that you would like.

Lump sums to individuals Any remaining funds in a money purchase pension on the death of the original member, or a beneficiary who had inherited a pension, may be paid as a lump sum. The amount of the lump sum will be the value of the fund immediately before the date of death.

Taxation - lump sum The tax treatment of death benefit lump sums largely depends upon whether the pension scheme member died before or after reaching age 75. Lump sums paid to an individual are generally tax free where the member died before 75. To be tax free the lump sum needs to be: paid within two years of the scheme administrator becoming aware of the death and for uncrystallised rights only, within the deceased member’s available lifetime allowance (LTA)*. *LTA is the total amount of pension benefits that can be accrued in within a pension fund in a tax efficient manner. The current LTA for the 2021/22 tax year is £1,073,100. Any lump sum above the deceased member’s available LTA will face a 55% LTA tax charge. If the member was to die post 75, the lump sum is taxable at the beneficiary’s marginal income tax rate. In addition, it is important to consider the wider implications of lump sum death benefits. Whilst pension funds remain invested within the pension wrapper, they sit outside of an individual’s estate for Inheritance Tax purposes. However, once a lump sum death benefit has been paid, the pension wrapper is removed, and the value will form part of the beneficiary’s estate for Inheritance Tax purposes.

Inherited drawdown

Death on or after age 75

Inherited drawdown is a much more flexible death benefit option that gives the individual much more choice. As per the lump sum option, the amount received on death will be the value of the fund immediately before the date of death.

Any drawdown payments are taxable on the recipient at their marginal rate. This may mean that the option of lump sum is less attractive and further tax planning may be required to make use of full tax allowances.

Flexi-access drawdown is one of the ways a beneficiary can use an inherited fund. If chosen, it will allow: funds to remain in the pension scheme under an arrangement set up for the beneficiary the beneficiary to draw what they need from this pot at any time until the fund is exhausted, or until the fund is used to buy an annuity the beneficiary to nominate who they’d like to benefit from any remaining funds when they die. In this way it’s possible for pension savings to pass down through generations

Beneficiaries Death benefits in the form of drawdown can be paid to individuals. But it’s not possible to set up drawdown arrangements for other bodies, such as charities or trusts. Ultimately, the scheme administrators will usually have discretion over who benefits, but it’s only possible for a beneficiary to take their funds under drawdown if the scheme in question offers drawdown. Most importantly, there are no age restrictions on who can have a drawdown arrangement or when benefits can be taken from an inherited pension. For example, a beneficiary can make withdrawals from the fund before they attain the minimum retirement age (currently age 55 but increasing to age 57 from 2028). This allows beneficiaries to have full flexibility and control over when and how they decide to use the pension.

Taxation - inherited drawdown

As the Inherited Pension continues to sit outside of the beneficiary’s estate, beneficiaries may wish to defer drawing any benefits from the pension. This allows them to hold a separate pot of money outside of their estate that can then be further passed on exempt from IHT. Finally, as the taxation of the inherited depends on the age at death of the last owner of the fund (i.e. the original member or subsequent beneficiaries) it’s possible for withdrawals from an inherited fund to be taxed differently as it passes to new beneficiaries on successive deaths.

Example Jenny dies at age 86, having nominated her son John to receive her flexi-access drawdown fund. As Jenny died after age 75, John is taxed at his marginal rate on any income withdrawals. John sadly dies aged 70, having nominated his daughter Julie to receive the remaining funds. Julie can take withdrawals from the drawdown account tax free as John died before age 75.

Summary Pension death benefits can be complicated and not all options may be available within your existing pension contract. Therefore, it is important that members of pension schemes understand the options that are available and ensure that they complete any pension death benefit nomination. **A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. The Financial Conduct Authority does not regulate Inheritance Tax Planning or tax advice.

As per the lump sum death benefit section, the initial tax treatment of a beneficiary’s drawdown depends on the age at the original members death.

Death before age 75 If the original member died before age 75, the residual inherited drawdown funds would generally be paid tax free. This means that the beneficiary could decide to draw a regular tax-free income from the pension or draw ad hoc tax-free withdrawals as an when required.

CALUM BUTT DIP PFS Financial Planning Team calum.butt@albertgoodman.co.uk

THE FUTURE FARMING RESILIENCE FUND – EXTENSION Albert Goodman Farms and Estates Team are delighted to be able to offer you a free:

HALF DAY CONSULTANCY in conjunction with AHDB Funded through DEFRA’s Future Farming Resilience Fund This offering is to provide business support to farmers to help navigate the changes and includes an individually tailored session with one of our specialists, on farm, and comes at no cost to you or your business. There will also be peer to peer support afterwards by way of a group meeting to discuss some of the findings and further ideas.

Investigate any other opportunities that are on offer and available. We will achieve the above by using our knowledge and experience together with the support of AHDB’s online tools: BPS Impact Calculator: How will BPS reductions impact your business?

This offering is administered via AHDB and they refer to it as The Farm Business Survey. AHDB will also provide you continued access to their Farm and Business Review tool.

Business Resilience Assessment: Is your business fit and ready for the future?

We will look to aid you through the transition by:

We urge you to take this opportunity and sign up for the Farm Business Review service providing your business with a free half day’s consulting and follow up meeting. Numbers are strictly limited and although Defra have extended the funding we can only accept appointments in February, March and April.

Helping you to evaluate the changes which are happening. Help to assess and demonstrate how these changes will impact your BPS payments. Aid your understanding on how, when and why your business may need to adapt.

KPI Express Calculator: How well is your farm performing?

Please do contact one of our consultants:

KATE BELL kate.bell@albertgoodman.co.uk

TOM STONE tom.stone@albertgoodman.co.uk

JAMES BRYANT james.bryant@albertgoodman.co.uk

KEEPING IN TOUCH If you would like this newsletter to be sent to a different address then please send your updated details to: gdpr@albertgoodman.co.uk You may also use this address to opt out of receiving this newsletter or for any other queries you may have. If you would like to see our privacy statement please log on to our website: www.albertgoodman.co.uk/privacy

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