Rural Intelligence - Winter 2022

Rural Intelligence for Farms & Estates WINTER

2022

Introduction

Welcome to our AG Rural Intelligence Winter 2022.

When I introduced our summer newsletter, we had just heard that Boris Johnson had resigned, and we were waiting to hear whether Rishi Sunak or Liz Truss would be our next prime minister. Since then, we have had three prime ministers and four chancellors, two mini budgets and an autumn statement. Our economic and financial climate continues to move at a rapid pace.

Against this backdrop, we have continued to keep up to date with changes coming out of government whilst advising clients on their opportunities which have included solar and other renewable projects, the sale of development land, road widening schemes, natural capital projects, mineral opportunities, and other diversifications as well as farm expansion and investment.

As business owners with interests in land, whether as tenants or owners, there are so many future opportunities for investment and new income streams. We aim to provide practical and technical support to rural businesses, and we hope in a continually challenging and volatile time, our newsletters provide an insightful update.

In this newsletter we provide an update on Baroness Rock’s recommendations on farm tenancies, our thoughts on tax under a new government, optimising your business structure to reduce risk as well as a straightforward comparison of capital gains tax reliefs when selling property, amongst other articles we hope you find useful.

Sam Kirkham PARTNER AND HEAD OF FARMS & ESTATES TEAM

CASH IS KING

Whilst the world continues to spin, we all need to eat. Farmers grow the daily food that we need and without them we would not have the milk for our cereal, wheat for our bread or beef for our Sunday roast.

With the global population set to rise to more than 10 billion by the end of the century according to the UN, there will be a continued need for farmers to produce our food.

This increasing need, coupled with current agricultural inflation (Agflation) running at over 50% for some farming businesses, means that more cash is needed to get products to the point of sale.

The farming industry has managed to adapt to a variety of different challenges over recent years and there will no doubt be more around the corner, including the loss of the Basic Payment Scheme subsidy income.

We have seen some very profitable farm accounts so far this year due to the increased output prices and limited increased inputs. 2023 is also looking to be a very profitable year for some, but profit does not always mean cash. With huge increases in working capital, living costs, wages, debt repayment (including bounce bank loans), and hire purchase repayments to name a few, there are a lot of demands for your cash.

As a result, it is essential that businesses forecast, plan ahead and manage their cash as much as possible. Whilst there will be changes to the plan along the way, not having a plan will not identify the cash required by a business. Involving the bank in any discussions at an early stage should help to secure their support rather than expecting them to increase funding at the drop of a hat at the eleventh hour.

Fixing costs can help to prevent inflationary increases from eating into your cash. For example, investing in solar panels to produce your own electricity can reduce exposure to energy price hikes in the future. With energy experts telling us that prices will remain high for some time, solar or diesel generators are being seen as more viable options for businesses.

Other options for managing cashflow include fixing interest rates or borrowing money to fund machinery investments, leaving cash available for ongoing business activities. It is also worth matching the repayments to the replacement policy so that you are not repaying the borrowing too quickly and taking cash out of the business whilst the asset is still being used.

Arable farmers could be selling crops on the future markets or using short or long pools to manage cashflow and obtain the best selling price. Ensuring that you calculate your cost of production and aim to maximize the selling price will increase your overall margin, which in conjunction with pool payments can help to smooth out your cashflow.

In summary managing your business cash requirements and mitigating the risk of increased costs or falls in sales as far as you possibly can, should ensure that your farming business thrives now and into the future to be able to feed the world.

JAMES BRYANT Farms & Estates Team

james.bryant@albertgoodman.co.uk

Time for a change... what does it mean for you?

As I sit here writing this article, Liz Truss has just resigned as Prime Minister of the United Kingdom.

This was an article we were thinking of writing in this edition, and the events of the past month have brought the reality of a change in government to the front of most professionals’ minds again.

This winter the Energy Bills Support Scheme needs to be paid for and the financial books of the United Kingdom are under heavy scrutiny. This means that whatever the colour of the party in No10, they will not be able to borrow the full amount required to fund the deficit and we will have to pay the burden through an increase in tax or spending cuts to our national services.

It is important for farming businesses and landowners to consider how a change in government may impact them. The following are some of the areas that a new government could target:

CAPITAL GAINS TAX (CGT)

There have long been rumours of reforms to CGT. Some of the changes that a new government could make are as follows:

Align CGT rates with income tax rates

This would increase the tax on gains within the basic rate band from 10% to 20% and from 20% to 40% and 45% within the higher and additional rate bands. This would double CGT liabilities.

This would not hugely impact the sale of residential properties which are already taxed at 18% and/or 28%.

WEALTH TAX

The justification for a Wealth Tax has probably never been as prominent as it is now. Our healthcare system requires serious investment, and the majority of UK households are in need of cost-of-living support due to rising energy bills.

The Wealth Tax Commission was established in Spring 2020 and the report recommended two options:

A 1% charge on all individual wealth above £500,000 payable over five years

A 1% charge on all individual wealth above £2,000,000 payable over five years

Reduce the annual exemption for CGT

The tax-free annual exemption of £12,300 could be reduced to £2,000 - £4,000. This would bring many more disposals into the charge to CGT and reduce the ability to spread gains over two or more tax years to reduce liability.

Further changes could be to remove or restrict Rollover Relief, Holdover Relief or Business Asset Disposal Relief.

At a threshold of £500k, this would raise £260billion and at a threshold of £2million, it would raise £80billion.

The report does not suggest there should be any relief for business assets, therefore for farming business, these liabilities could be sizable. As a result, assets may need to be sold to fund the tax.

INCREASING TAX ON INVESTMENT INCOME

Dividends are currently taxed at 8.75%, 33.75% and 39.25% within the basic, higher, and additional rate bands respectively. Income tax thresholds are currently 20%, 40% and 45%, therefore there is a large discrepancy across all tax rates.

Dividend tax rates could therefore be increased to align with earned income tax rates. This change would particularly impact our farming clients who trade through limited companies and draw money via dividends. It could make trading through a limited company much less tax efficient.

Further changes could be to reduce or remove the tax-free allowances for both dividend and savings income.

INHERITANCE TAX (IHT)

Currently, only 5% of deaths in the UK result in any IHT being payable. Therefore, many view IHT as requiring reform and both the Office for Tax Simplification, and the All-Party Parliamentary Group have made changes to make IHT simpler.

Some reforms that could be implemented are:

Removal of IHT reliefs

Under current reliefs most farming businesses and landowners benefit from Agricultural Property Relief (APR) and Business Property Relief (BPR). This often means that no IHT is payable on death.

One option could be to remove either APR or BPR. The removal of APR would primarily impact landowners who rent their land out as this would likely lose relief. The removal of BPR would impact farming businesses with any hope value on land or any let property, as these would become chargeable to IHT on death.

A restriction or removal of the CGT uplift on death

Under current legislation, the death of any UK resident results in the base cost of all death estate assets being increased to market value. Subsequent sales of assets inherited from the estate are then often CGT free. There is an argument that this uplift should be removed or restricted.

If the CGT uplift on death were completely removed, then assets would be inherited with the original base cost of acquisition. This would result in a considerably higher CGT liability if or when the asset is sold.

For farming businesses and landowners, the above changes would have a significant impact on the IHT due on death. Assets may need to be sold to fund the IHT liabilities, or money may have to be borrowed from the bank. Reforms to IHT could also impact the value of farmland in the future.

In summary, a change in party at Number 10 could have some potentially large tax implications for our farming and landed estate clients. It is therefore important to consider your exposure to the above changes and to plan for how best to mitigate the impact.

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

Working together for a thriving agricultural tenanted sector

It was refreshing to read the recently published report by Baroness Kate Rock; ‘working together for a thriving agricultural tenanted sector’, albeit 116 pages. It considers how changes can be introduced to balance the interests of both landlord and tenant to support a positive relationship and enable the tenanted business to be a success.

I have a personal interest in the report with my husband being a tenant farmer, but it is also important from a professional perspective when advising both tenant farmers and landlords. Although there is a place for shorter-term tenancies in certain situations, gaining the security of a longer-term tenancy facilitates progressive strategic decision making and access to funding. Successful tenant farmers have often been given the freedom and control required to push their businesses forward.

The report recognises that tax is a key driver in landlord behaviours and within the 74 recommendations there are 10 tax related recommendations.

These include the introduction of 100% agricultural property relief (APR) on the agricultural value of the land from day 1 of a tenancy >8 years, with no break clauses for the landlord to be able to shorten it. It also suggests considering business property relief (BPR) as well as APR which could provide relief on the value over and above agricultural value. This really could incentivise landowners to provide longer-term tenancies, especially if the rents received can be treated as trading income for the landlord. To ensure that the tenant is not detrimentally affected, stamp duty land tax (SDLT) also requires a reform as this currently discriminates against longer-term tenancies.

One of the advantages of a shorter-term tenancy is the potential for change of use going forward, whether this be for development or developing habitat. In contemplating how to minimise the loss to tenants the report suggests that the compensation paid be re-examined to provide a fair pay out to the tenant when land is taken for development, together with anti-avoidance to stop the landlord taking the land back in-hand prior to this point.

If land is taken back the report suggests that the landlord should be incentivised to roll the proceeds into other let property through capital gains tax relief. Encouraging both the landlord and the tenant to make significant investments secures the long-term future of the farms and helps to ensure that tenanted farms have viable, up-to-date businesses.

The report considers the future support and funding for agriculture and making the future schemes flexible; perhaps the

length of the tenancy or beyond if it is a rolling tenancy or there is further succession. It also makes clear that food security should be an objective alongside the environmental objectives.

It recommends that establishing habitats be treated as trading income with both APR and BPR available from IHT. As it currently stands, land used for environmental purposes may fall outside of the definition of ‘agriculture’, with it potentially (although not tested) breaching the Rules of Good Husbandry. Diversification should be encouraged but consideration needs to be given to the tax implications for the landlord. In summary the report looks at improving tenantlandlord relationships; aiming to build on collaboration, encourage investment, long-term stability and support successful tenants. All of which should help to minimise losses and have a positive impact on the agricultural sector.

KATE BELL Farms & Estates Team

kate.bell@albertgoodman.co.uk

Managing risk

Historically the majority of farming businesses have operated as sole traders or by using partnerships. This is simple but provides unlimited liability.

Your personal assets, such as your private residence and savings, could be at risk to settle debts of the business.

LIMITED COMPANY

Unlike a sole trader or partnership, a limited company is a separate legal entity. It is therefore the company that is liable for the debts, losses, and any claims made against the business.

If for any reason the company is unable to pay its debts, then the money that shareholders stand to lose is ‘limited’ to their original investment – so, the amount paid for their shares.

Unless directors have provided personal guarantees, any property held outside the company is protected. *

*The one major exception to this is in cases of fraud, where the personal liability of directors is unlimited.

LIMITED LIABILITY PARTNERSHIP (LLP)

An LLP is a hybrid of a limited company and a partnership. While it is taxed similarly to a partnership, an LLP also provides limited liability.

With an LLP, the partners’ liability is limited to their OWN investment, unlike a normal partnership where the partners are jointly and severally liable for ALL the partners’ debts.

LIMITING LIABILITY WITH A HOLDING COMPANY

There may be circumstances where one company is not enough. Where property and assets are held in a company and the business is subject to higher risk, either due to the nature of the business or through diversification into more high-risk activities such as wedding venues or food production, then those assets would be exposed to any claim.

Using a separate company from the main trading company to hold the property and assets could limit this risk by protecting the property.

The choice of structure for any business is an important one. There is no ‘one size fits all’ approach and the structure will depend on a variety of factors, such as the nature and size of the business, the profits generated and the respective tax implications.

It should also be remembered that circumstances change, and so the choice of business vehicle should be continually revisited.

SLURRY INFRASTRUCTURE GRANT

We were really pleased to see that the long-awaited Slurry Infrastructure Grant has been launched.

You can apply for the grant if you are a landlord or tenant who does not have 6 months of serviceable storage onsite. The grant can be used for replacing existing stores that are no longer fit for purpose, adding further storage, or expanding an existing store. The minimum grant is £25k and the maximum is £250K. It is based upon a standard amount per item rather than a proportion of the costs and therefore you do not need to gain three quotes for the works you are applying for.

It is a two-stage process. Stage one is an online checker regarding your current and future slurry requirements and will be open from 6 December to 31 January. Should there be high demand for the grant, claims will be prioritised on their environmental benefits. If you are eligible and chosen you will be invited to make your claim. This needs to be completed before 28 June 2024.

ROSIE TURNER

rosie.turner@albertgoodman.co.uk

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

ROLLOVER VS BADR

When selling your farm or farmland there are several tax planning options available to mitigate the capital gains tax (CGT) liability. These include Rollover Relief and Business Asset Disposal Relief (BADR) formerly known as Entrepreneurs Relief. With the lifetime allowance reducing from £10million to £1million, the decision regarding whether to claim BADR and pay your tax liability upfront or rollover the gain is harder than in previous years.

Business asset disposal relief (BADR)

BADR is available for individuals and trustees (not companies) disposing of all or part of a business, the assets of a business after it has stopped trading or shares in a company.

Each person has a maximum lifetime limit of £1million total gains on which BADR can be claimed. This £1million gain is charged at a reduced tax rate of 10% rather than the usual CGT rate of 20%. With rumours that CGT rates may align with income tax rates in the future, BADR enables you to lock in your CGT liability now.

Rollover Relief

Rollover Relief can be claimed when trading assets are disposed of and the proceeds are reinvested in new trading assets. Rollover is available to both individuals and companies.

The capital gain on the disposal can be deferred by rolling it into the cost of another business asset. The cost of the new asset is reduced by the gain and when the replacement asset is sold the gain becomes chargeable. Assets which qualify for Rollover Relief have a life of over 60 years, ie. land, buildings, fixed plant and machinery and potentially Furnished Holiday Lets.

The new asset must be purchased 12 months before the disposal or 36 months after the disposal takes place. By reinvesting all proceeds, you can reduce your capital gain to nil.

Partial Rollover Relief

Where proceeds are not fully reinvested within 36 months of disposal, relief is available only where the amount reinvested exceeds the allowable expenditure, i.e. the base cost. Any amount not reinvested becomes chargeable to CGT.

If non-farming assets are purchased with the proceeds, then it may be possible to claim both Rollover Relief and the full £1million of BADR.

Examples

The below examples assume that a farm with a base cost of £1million is sold by an individual (not a company) for £5million. There are no disposal costs, and the individual has no annual exemption available.

Example 1: Business Asset Disposal Relief

The farm is sold and the trade ceases. BADR is claimed and no other reliefs are applied.

£

Proceeds 5,000,000 Costs (1,000,000) Gain 4,000,000

Tax at £1million @ 10% 100,000 Tax at £3million @ 20% 660,000 Tax payable 760,000 AssetsCash 4,240,000

Example 2: Rollover Relief

The farm is sold and the full £5million of proceeds are reinvested in trading assets within 36 months of disposal. This results in no CGT being paid at this time. The new asset cost £5million therefore the base cost is £1million (£5million less the £4million gain).

£

5,000,000 Base cost (1,000,000) Rollover relief (4,000,000) Gain arising on disposalTax payable 0.00 Assets 5,000,000 Cash -

Proceeds

Example 3: Partial Rollover Relief

The farm is sold but the trade does not cease. £4million is reinvested in a new farm or land, however as the trade has not ceased BADR is not available. The £4million reinvested exceeds the initial base cost of £1million therefore £1million becomes chargeable.

£

Example 4: Partial Rollover Relief & BADR

The farm is sold and the trade ceases. £4million is reinvested in trading assets such as Furnished Holiday Lets. Similarly, to the previous example, £4million of the £5million is reinvested, however the trade has ceased, and BADR can be claimed meaning that the gain is taxed at 10% rather than 20%.

£

Proceeds

5,000,000

Reinvested (4,000,000) Not invested 1,000,000

Gain arising on disposal 4,000,000 Partial rollover 3,000,000

Total Gain 4,000,000

Partial rollover (3,000,000) Taxable Gain 1,000,000 Tax payable @ 20% 200,000

Assets 4,000,000 Cash 800,000

Proceeds

5,000,000

Reinvested (4,000,000) Not invested 1,000,000

Gain arising on disposal 4,000,000 Partial rollover 3,000,000

Total Gain 4,000,000

Partial rollover (3,000,000) Taxable Gain 1,000,000 Tax payable @ 10% 100,000

Assets 4,000,000 Cash 900,000

Another way to reduce your CGT liability is by using the Enterprise Investment Scheme (EIS), allowing you to defer the gain using Rollover Relief and investing in qualifying shares. For more information on EIS please contact our Financial Planning team for a free of charge initial meeting.

Farms & Estates

alex.westcott@albertgoodman.co.uk

ALEX WESTCOTT Team

Farmers should prepare for new VAT penalties for late filing/ payment of VAT returns

As of today (Autumn 2022), the existing “Default Surcharge” system is focused on penalising late payments of VAT. So, if a farmer is due a repayment of VAT no surcharge arises if the VAT return claim is submitted late.

You will receive a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full, or a payment plan is agreed.

Whereas the existing system allowed at least one “default” before penalties were levied, the new arrangement does not. But as a concession, HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if payment is made in full within 30 days of the payment due date.

In addition to the late payment penalty, HMRC will charge interest at the Bank of England base rate plus 2.5%. A formal time-to-pay agreement reached with HMRC will prevent penalties being charged but not interest.

Late filing penalty

From 1 January 2023, the current penalty system is undergoing a significant reform. In many ways, the new system for penalising late payments of VAT will be fairer, but in addition to penalties (and interest) being levied for late payment of VAT due, penalties may accrue for not filing the return on time.

Late payment penalty

The key change is that the sooner a business pays the VAT due, the lower the penalty rate will be. This contrasts with the Default Surcharge System where the penalty was the same whether payment was one day or one year late. Under the new system, when fully implemented: -

You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.

You will receive a first penalty calculated at 2% on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.

You will receive a first penalty calculated at 2% on the VAT you owe at day 15 plus 2% on the VAT you owe at day 30 if you have not paid in full or agreed a payment plan by day 30.

A points-based system will apply to VAT returns starting on or after 1 January 2023. A business will receive a point for every late VAT return. If its points exceed a threshold, it will receive a £200 penalty and a further £200 penalty for each subsequent late submission.

Businesses submitting monthly returns will reach the threshold at five late returns, for businesses on quarterly returns, this will be four.

If enough subsequent returns are submitted on time, the points are reset to zero. For quarterly returns, “this period of compliance” is 12 months, for monthly returns, 6 months.

Among other considerations, the new late filing penalty may affect the desirability of monthly (rather than quarterly or even annual) VAT returns, particularly for those whose average claim is below the potential late filing penalty of £200.

STEVE CHAMBERLAIN VAT Senior Manager steve.chamberlain@albertgoodman.co.uk

XERO TOP TIP - CHECKING BANK BALANCES AND REFRESHING BANK FEEDS

Although Xero is typically on a live bank feed with your bank account it doesn’t always mean it’s correct or agrees to your bank statements. This needs to be manually checked at least once a year but typically I would check each time you’re going to submit a VAT return as if an issue is found this will save you time tracking down the issue.

To do this you need to either click on “Manage account” on one of the bank screens or the three dots to the right of your bank account on the Dashboard screen – after this you need to select Reconciliation Report. Once on this report you’ll need to select a date you wish to check which will then produce something like the below, the Statement Balance is the figure that should agree to your bank statements – if everything is reconciled then the Balance in Xero should agree to the Statement Balance too.

Every 90 days you will have to refresh your bank feed which links your bank statements through to your Xero. Unfortunately, there is no workaround for this as it is a legal requirement for this reauthorisation to happen.

Xero will typically give you several prompts when the link has expired such as the example below taken from a Dashboard screen. If you click “Renew bank connection” this will then redirect you to your online banking screen where you can log-in with your online banking details.