Agricultural Focus Winter 2022

Agricultural Focus DRIVING LIFELONG PROSPERITY

Winter 2022

SPOTLIGHT ON TAX CHANGES

SIGN UP TO RECEIVE OUR BUSINESS UPDATES INSIDE Reform of income tax basis periods Natural capital > VAT and other tax changes ahead > Meet our team: Pip Cusack > Changes to HMRC’s Trust Registration Service > >

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Reform of income tax basis periods In conjunction with the introduction of Making Tax Digital (MTD) for income tax, HMRC is now looking to tax profits in line with the tax year, rather than the current approach of taxing profits based on the accounting period of the business.

This change will impact farming individuals and partners that do not have a 31 March or 5 April accounting year end date, therefore, catching businesses with a September year end to tie in with the harvest year.

The new rules are due to come in from April 2024 which is the same time as MTD for income tax. A transitional period will apply in the 2023/24 tax year.

An example of how the taxable profit will be calculated for an existing business, drawing its accounts up to 30 September, is as follows: Profit share for the period from 1 October 2022 to 30 September 2023 (as currently); plus

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Profit share for the period from 1 October 2023 to 5 April 2024; less

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Overlap relief brought forward

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In the 2024/25 and subsequent tax years, the individual will be taxed on part of the profit from two accounting years: 6 April 2024 to 30 September 2024 (circa six months of the accounting period to September 2024); plus

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1 October 2025 – 5 April 2025 (circa six months of the accounting period to 30 September 2025)

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This will lead to an acceleration of tax liabilities and, as such, it is anticipated that any additional tax liability arising as a result of the transitional rules in 2023/24 (e.g. profit for the accelerated period to 5 April 2024 less any overlap profit) can be spread over five tax years, rather than all being taxed up front.

Although it makes good sense to tax individuals on earnings arising in the tax year, the acceleration of profit could lead to a higher marginal rate of tax which could lead to cash flow issues.

The latest draft legislation includes amendments to treat the transitional profit as a one-off taxable item, such that it is not included in the net income calculation for determining an individual’s entitlement to annual personal and pension allowances, as well as other means tested benefits such as the high-income child benefit charge. The draft also confirms that any transitional profits will be ignored for farmers averaging calculations.

Where a loss is created or increased by relieving overlap profits, the latest announcement allows for this loss to be carried back up to three years against trading profits rather than one. If more beneficial, the taxpayer can still choose, instead, to offset against total income of the current or preceding year.

The tax return filing deadline for the 2023/24 tax return will be 31 January 2025. This would give just four months for the accounts for the year ending 30 September 2024 to be finalised, to allow an accurate allocation of profits for the period to 5 April 2024.

In many cases, it will not be possible to finalise accounts within the four-month period; therefore, in the first instance, estimates can be used which will need to be corrected. The options currently being considered to address this issue include: Allowing a provisional figure to be amended at the same time as filing the following year’s tax return;

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Extending the filing deadline for farmers and landowners e.g., as they are more complex partnerships with seasonal trades;

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Amending any differences between provisional and actual figures in the following year’s tax return; and

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Retaining the current rules such that any estimated figures would need to be amended once actuals are known.

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To simplify the tax treatment, you might consider changing your accounting date to 31 March or 5 April. Before doing so, you should discuss the timing of any change with your tax adviser, as it could result in accelerating taxable profits, without the option to spread this over five years.

NATURAL CAPITAL With the focus on climate change and the Government’s target of net zero emissions by 2050, coupled with the loss of income from the basic payment scheme, farmers will increasingly be looking at the natural capital on their farms, and how they can take advantage of this. In addition, there is likely to be increasing pressure from customers who will want to know the carbon impact of the products they are buying, be that the supermarkets or the end consumer.

The starting point will be to develop a carbon strategy, whereby a business understands its current carbon emissions and develops a plan to reduce it. There are a number of tools available to help with this such as the Farm Carbon Tool Kit. There are many options open to farmers to reduce their emissions. These include simple things such as powering the grain dryer using renewable energy rather than fossil fuels, to changes in farming methods towards regenerative agriculture and considering cropping choices.

For those wishing to go further, there will be options under the Environmental Land Management Scheme (ELMS), where farmers will be paid for work to enhance the environment. Much of this is likely to be an extension of the current countryside stewardship schemes.

For those with unproductive ground, woodland creation may be a viable option, with the aim of sequestering carbon. The Woodland Carbon Code is a voluntary standard for UK woodland creation projects, providing assurance about the carbon saving of woodlands. All projects must be registered on the UK Land Carbon Registry before the start of planting. This enables the amount of carbon that can be sequestered to be calculated, and subsequently sold if desired.

The concept of biodiversity net gain (BNG) has been introduced in the Environment Act 2021. Essentially, it aims to ensure the overall amount of natural habitat is enhanced and left in a better state where development is taking place. The Act requires a compulsory 10% uplift in biodiversity. Where it is not possible to obtain the uplift on the development site itself, it can be offset on local land. This will provide an opportunity for landowners to receive payments from developers to undertake the work on their behalf, for periods of potentially 30 years or more. DEFRA is developing a system to measure BNG. Landowners may be able to meet the targets by enhancing current habitat, or alternatively by taking poorer areas out of production.

Whatever options landowners decide to take there will be several considerations. Currently, markets are still developing and consequently there is uncertainty as to what is the right price, and potentially the structure of any legal agreement. Where land is tenanted, consideration will need to be given to whether it is the landlord or the tenant who has the natural capital rights and is able to exploit them. The tax position is still unclear and the impact on the inheritance tax reliefs, agricultural property relief and business property relief, will need to be considered.

There is no doubt that enhancing natural capital will become an increasingly important income stream for landowners, as well as offering many other benefits. Careful planning will be needed to ensure the best outcome for the business when deciding which approach to adopt.

VAT AND OTHER TAX CHANGES AHEAD Our Summer 2021 Focus included an article on furnished holiday lettings and the reduced rate VAT benefits. Time is running out on the reduced rate of VAT, in addition there are additional changes to VAT and tax reporting to be aware of.

VAT CHANGES 1. Temporary reduced VAT rate on hospitality and holiday accommodation – 1 April 2022 The reduced rate of 12.5% on hospitality and holiday accommodation is due to revert to the standard rate of 20% on 1 April 2022. There is still an opportunity for furnished holiday let owners to apply the reduced rate on holidays up to 31 March 2021 and also on deposits and bookings paid for by this date. Perhaps one last push to help cashflow and offer early payment discounts?

Wedding venues, farm shop cafes and other hospitality businesses will need to make a diary note to reprogram the tills and invoicing systems to make this change to any applicable catering supplies.

2. Making VAT digital (MVD) – April 2022 Most businesses with taxable turnover of over £85,000 have been registered for MVD since April 2019. This will become mandatory for all businesses registered for VAT with effect from VAT periods starting after 1 April 2022. If you are relying on the exemption for small business where your turnover is below £85,000, you will either need to start filing VAT returns digitally or qualify for one of the other exemptions. The exemptions which will continue to apply from April 2022 are: >

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it is not practical for you to use digital tools to keep your business records or submit your VAT returns – this may be due to reasons such as age, disability or location you (or your business) are subject to an insolvency procedure

your business is run entirely by practising members of a religious society (or order) whose beliefs are incompatible with using electronic communications or keeping electronic records

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If you are currently trading below the VAT threshold you should review your VAT position, it might be that deregistering is the best option for you. If remaining VAT registered is important to your business, then now is the time to take advice on the best MVD software for you.

INCOME TAX CHANGES 3. Making Tax Digital (MTD) – 6 April 2024 (delayed from 6 April 2023) Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for income tax from 6 April 2024. This will require five reports to be submitted through the year – four quarterly reports and an end of period declaration. The timing of tax payments will remain unchanged. This is a seismic change to the existing annual self-assessment format that has been in place since 1996.

Although this change is over two years away, time will flash by. The change will have the greatest impact on the very small businesses and landlords with a small property portfolio who currently keep manual records.

However, larger businesses that are not required to be registered for VAT because their supplies are exempt for VAT will also be caught.

There are various, easy to use software packages available on the market, Xero and Quickbooks to name just two. If the MTD requirements affect you, plan ahead to make sure you can meet your obligations.

There is a time delay for companies, HMRC has stated MTD for corporation tax will not be introduced before 2026.

If you need help setting up a digitally compliant system of have any other queries do get in touch.

Meet our team A Q&A with Tax Manager in the Farms and Estates team, Pip Cusack.

WHAT IS IT LIKE BEING A TAX ADVISER IN THE AGRICULTURAL SECTOR RIGHT NOW? The agricultural industry is so diverse and that’s one of the most exciting parts of working in it; it is ever-changing and we’re constantly working with clients to adapt to the landscape (pun intended!).

There are challenges anticipated ahead, with changing tax rates in some shape or form, but we don’t know what is coming or when; two Budgets have been and gone where we expected increases of some sort but, with the exception of changes in the rate of tax for dividends, corporation tax and NIC, nothing much has materialised. This makes our role so much more challenging when we’re working with clients to consider their main priorities and implement solutions that will put them in the best position for the future.

WHAT DO YOU ENJOY MOST ABOUT YOUR ROLE? I can’t imagine I would have been saying this 12 months ago, but I really enjoy inheritance tax planning. It can often be a topic of taboo, no one really likes to speak about what happens when they are no longer here, but I see it as an essential part of farming life, family businesses and looking after the assets people have worked hard for.

When we are involved from an early stage, we can discuss the family’s wishes for succession and help strike a balance between ideal wishes and a tax efficient solution.

My key piece of advice would be for people to talk about succession and inheritance with family, accountants and solicitors – all parties involved – no matter how hard it is, it will be worth it in the long run.

WHY DO YOU WORK IN THE AGRICULTURAL SECTOR? I’m not from an agricultural background, which is unusual in our team, but I have a great interest in rural businesses.

After leaving school, I went to the Royal Agricultural University, Cirencester, with no thought of what my future career might be. Although I enjoyed the practical elements of our course, I actually found figures incredibly interesting and that I was more drawn to this. When I left university, I was lucky enough to secure a training contract with a firm of accountants with an agricultural team.

For me, tax planning is about looking forward; you need a problem-solving mind, and it is where I feel I can really make a difference to our clients’ future plans for their business. So, having qualified as a chartered accountant in September 2017, I turned my focus to tax and qualified as a chartered tax adviser in January 2021.

TELL US SOMETHING THAT WE MIGHT NOT KNOW ABOUT YOU? I white water kayak in my spare time; I follow the weather as much as our farming clients do so that I can find out when, and where it is going to rain and I then head in that direction! As long as there is rain and hills – Yorkshire, Wales, Lake District, Dartmoor etc. – I’ll be happy.

If you would like more information on inheritance tax planning or tax advice, please get in touch with Pip Cusack at pip.cusack@hazlewoods.co.uk or 01242 680000.

CHANGES TO HMRC’S TRUST REGISTRATION SERVICE In 2017, HMRC introduced new guidance for trusts, requiring them to register under the Trust Registration Service (TRS) when a liability to UK tax had been incurred.

From September 2022, all trusts will now have to register under TRS, unless they fall within one of HMRC’s specific exemptions. A trust will be registerable under HMRC’s TRS where: >

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it is an express trust. An express trust is one which was intentionally created. Most UK trusts are express trusts; or it is a UK or non-UK trust with a liability to UK taxation.

There are a number of trusts which are excluded from the filing requirement, these include: Co-ownership trusts Trusts holding jointly owned property (including bank accounts) where the trustees and the beneficiaries are the same person(s).

Trusts created by will A trust created by will that holds only property from a deceased person’s estate is excluded from registration for a period of two years from date of death.

Historic pilot trusts A trust in existence before 6 October 2020 that holds assets with a total value of less than £100 will be exempt from registration.

Life policy trusts Insurance policies written in trust may be excluded from registration during the lifetime of the person assured.

There are certain conditions to the exclusions, critically, an exclusion will only apply where a trust is not liable to UK taxation.

Bare trusts are not specifically excluded from the requirement to register as they are typically deliberately created; therefore, unless they also meet one of HMRC’s exclusions, they will need to register under the new rules.

The deadline for registration will depend on the type of trust and when it was created: Non-taxable trusts in existence on or after 6 October 2020 will need to register by 1 September 2022

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Trusts created after 1 September 2022 will have 90 days to complete the registration

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Taxable trusts in existence to date should already be registered under the service, or by 31 January 2022 if the trust’s first UK tax liability occurred in 2020/21.

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Once registered, the trustees will be responsible for ensuring that the information held on the TRS is kept up to date annually. Any changes to trust details and circumstances held under the TRS should be updated within 90 days of the change.

From 2022, HMRC may share the information held within the TRS with third parties involved in the prevention of anti-money laundering and counter terrorist financing, though it is stated that this will be in limited circumstances.

If you are a trustee and are concerned regarding the position of your trust, please do not hesitate to get in touch with a member of our tax team, who will be happy to advise you accordingly.

MEET THE TEAM

NICK DEE nick.dee@hazlewoods.co.uk

NICHOLAS SMAIL nicholas.smail@hazlewoods.co.uk

LUCIE HAMMOND lucie.hammond@hazlewoods.co.uk

PETER GRIFFITHS peter.griffiths@hazlewoods.co.uk

SUE BIRCH sue.birch@hazlewoods.co.uk

SHIRLEY ROBERTS shirley.roberts@hazlewoods.co.uk

DANIEL WEBB daniel.webb@hazlewoods.co.uk

PIP CUSACK pip.cusack@hazlewoods.co.uk

CLAIRE BRIESE claire.briese@hazlewoods.co.uk

LYN MOREY lyn.morey@hazlewoods.co.uk

HANNAH REASON hannah.reason@hazlewoods.co.uk

HEIDI BRADLEY heidi.bradley@hazlewoods.co.uk

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Hazlewoods LLP and Hazlewoods Financial Planning LLP produce regular updates, using our expert commentary to provide you with information about our services, events and topical premium business news.

SIGN UP/UPDATE ONLINE: http://bit.ly/hazlewoods

Staverton Court, Staverton, Cheltenham, GL51 0UX Tel. 01242 680000 www.hazlewoods.co.uk / @HazlewoodsAgri This newsletter has been prepared as a guide to topics of current financial business interests. We strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of the material can be accepted by us. Hazlewoods LLP is a Limited Liability Partnership registered in England and Wales with number OC311817. Registered office: Staverton Court, Staverton, Cheltenham, Glos, GL51 0UX. A list of LLP partners is available for inspection at each office. Hazlewoods LLP is registered to carry on audit work in the UK and regulated for a range of investment business activities by the Institute of Chartered Accountants in England & Wales.