Rural. Edition 1, 2019
UK agriculture Let’s lead from the front
The farming industry has never faced such uncertain times across all sectors. We discuss how the act of leading from the front can benefit everyone.
Financial experts, fuelling ambition
Farming & Financial Technology
Financial Planning
Dairy Industry Focus
12 – 15
20 – 22
24 – 30
Welcome
Specialist farming accountancy, tax and financial planning services
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Rural. Edition 1, 2019
Welcome
Welcome to the latest edition of Old Mill’s Rural Insight publication, focusing on farming and rural businesses. While MPs and the media – and at times the farming community itself – have focused on our relationship with the EU of late (let’s ignore the ‘B’ word for a moment!), there are plenty of changes, challenges and opportunities facing farmers and the rural economy, well away from the Brussels and Westminster bubbles. This edition of Insight includes an overview of the findings of our Milk Cost of Production Survey 2019 (compiled in collaboration with The Farm Consultancy Group), which provides a comprehensive breakdown of the region’s dairy industry. The key messages from the report are that while last year’s dry summer led to higher feed costs and dented many farm profits, much of that impact has been ring-fenced in last year’s figures, and current projections are looking positive. The survey also highlights the huge variance between the top and bottom 10% of producers by profitability – ranging from £585 profit per cow, to a loss of £471 per cow – underlining the importance of controlling costs, improving efficiencies and monitoring performance as far as possible. Of course, not everything can be controlled. Amy Peacey of solicitors Clarke Willmott provides an accurate assessment of the current situation surrounding dairy contracts, one area
where farmers are often on the wrong end of uncertainty and risk. But there are steps that farmers and rural businesses can take to manage uncertainty and reduce risk, and several are covered in this edition. They include greater use of benchmarking (discussed here by Philip Dolbear of the Agriculture & Horticulture Development Board), making the most of the advantages offered by Cloud accounting and Xero, and carrying out a winter health check of your personal finances. Tax planning can also significantly improve business efficiency, and in this Insight we explore tax planning options for dairy farmers, the implications for farmers of the recent review by the Office of Tax Simplification (OTS), tax considerations in relation to farm tenancies, the impact of possible changes to Inheritance Tax (IHT), and the potential tax reliefs of diversifying into woodland. And of course, we can’t escape Brexit altogether. Rural Director, Richard Haines, discusses how we can lead from the front. If you need any more encouragement to improve efficiency, combine new technology with traditional practices, and identify opportunities for diversification, the story of Old Mill clients, the Davies family, their farm and the success of Dorset Blue Vinny should be welcome reading. These topics and many more will be covered in the range of Old Mill events detailed in this edition, and we look forward to meeting and talking with as many of you as possible over the coming months.
Andrew Vickery Head of Rural
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Contents
Your Old Mill Contributors Andrew Vickery, Head of Rural 01935 709321 andrew.vickery@om.uk Julia Banwell, Director, Chartered Financial Planner 01749 335048 julia.banwell@om.uk Charlie Bowyer, Adviser 01225 701251 charlie.bowyer@om.uk
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Ben Carter, Business Development Manager - Rural 07825 620052 ben.carter@om.uk Stuart Coombe, Chartered Financial Planner 01392 351301 stuart.coombe@om.uk Neil Cox, Director 01749 335019 neil.cox@om.uk Richard Haines, Director 01225 701225 richard.haines@om.uk Dan Heal, Adviser 01935 709449 daniel.heal@om.uk
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Paul Neate, Director 01225 701224 paul.neate@om.uk Laura Wylie, Senior Tax Manager 01225 701244 laura.wylie@om.uk
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Rural. Edition 1, 2019
Contents
08
Think Tank
Focus: Dairy Industry
06 UK agriculture -
24 Dairy farming –
Let’s lead from the front
08 The office of
your tax planning options for 2019/20
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‘is it that simple?’ Tax Simplification
Farming & Financial Technology
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Focus: Dairy Industry Guest Spot
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Rural data AHDB: making the best use of benchmarking So you’re using Xero – what happens now?
The Milk Cost of Production Survey 2019
Mandatory milk contracts: an end to unfair contract terms?
Focus: Dairy Industry Client Case Study
30 Helping Woodbridge Farm and Dorset Blue Vinny build a future proof business
News
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The Farm Tenancy – is it an expense of the business? Tax Relief on woodland could be more attractive than you think
Financial Planning
Recruitment
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We are recruiting (but keep your Wellies on, you’ll need them)
Events
34 Old Mill Events, Seminars and Focus Groups
20 Possible changes for
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Inheritance Tax rules
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Reviewing your personal finances – winter health check
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Think Tank
UK agriculture Let’s lead from the front Having worked in the agricultural sector for nearly 20 years, I don’t believe the industry has ever faced such uncertain times and this is the case across all sectors. With Brexit being almost solely blamed for the current disastrous drops in commodity prices, is this just a storm in a teacup or is it masking a true shift in consumer habits? At the point of writing this article, Extinction Rebellion are causing havoc in London, supporting what is arguably a real problem with the wrong approach. As the true fallout of Brexit is only just being understood, and therefore I will not comment in detail, I don’t believe it can be solely blamed. What is clear is that consumer eating habits are changing and their expectation of what a farm should be is often widely different to the reality of the current practices. Veganism is widely cited as
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an issue but I believe the true issue is the constant misrepresentation of UK agriculture promoted largely through social media campaigns. Pictures and video clips of livestock units outside the UK are frequently used to tarnish and destabilise UK farming practices. I am proud of UK agriculture and I believe it is time for us all to lead from the front, proactively engaging with consumer groups to develop sustainable farming practices across all sectors, whilst contributing to policy change. We all recognise the issues currently facing the industry; of bull calves, antibiotic use in the livestock sector, excess chemical applications in the arable sector, to name just a few. However, I do believe these can all be overcome with a shift in mind set, recognising that such issues are a priority to address as part of any planning process. Sexed semen is just one technology which is now far more reliable than it once was and is an obvious mechanism to prevent the need to shoot dairy bull calves. Setting bold targets, such as eradicating the practice, in no more than five years should not be shied away from. Selective breeding and genomics also
have a clear place to helping reduce antibiotic use. Cover crops, companion cropping and working with the livestock sector provide opportunity to the arable sector to reduce soil erosion as well as solving problems such as the flea battle. With a positive approach, UK agriculture can position itself as sustainable and, as a result, up-sell our products and demand the price we all need to earn an honest living. Coupled with this comes the positive effect we can have on climate change. We need all levy paying farming bodies to step up to the plate, and through science and technology truly defend UK agriculture whilst providing profitable solutions to meet the public’s expectations. Change is always frightening, but it is absolutely key to survival in the next five years. Subsidy reform, regardless of the current agriculture bill, I believe will now only ever focus on the environment and wildlife as priority for payments which should also bring opportunity. Many farms already do their bit, but provided we can communicate and work with the policy makers, UK agriculture can evolve for maximum benefit for all, provided a profit is achievable.
Rural. Edition 1, 2019
As farmers and landowners, we are a key component to reducing carbon from the environment, putting in place crops and woodland to positively remove carbon from the atmosphere. With the right promotion we can become the solution not the problem, joining up with airlines and other such corporates to help them offset their carbon footprint. I summarise by saying it’s time to lead from the front. With eating habits changing, the constant desire to produce more could be the wrong approach and instead we should be working with the consumer to farm sustainably for the benefit of all.
Richard Haines
“As farmers and landowners, we are a key component to reducing carbon from the environment, putting in place crops and woodland to positively remove carbon from the atmosphere.� 7
Think Tank
The office of ‘is it that simple?’ Tax Simplification Changes are afoot. We now have the Office of Tax Simplification (OTS) advising the government on all matters relating to tax, in some cases very relevant to farmers. Details of the OTS review have recently been published, but it’s important to state that, at this stage, these are simply suggestions as a result of the research and review – there is no indication that any of the proposals will become law. Despite this, it does make for interesting reading, and if any of the plans were put into place there could be a significant change to Capital Gains Tax (CGT), main residence and Agricultural Property Relief (APR).
Definite Inheritance Tax (IHT) changes for the farmhouse and residential property This issue is particularly relevant for farmers who are selling a second home, have rental property, farm workers cottages or holiday lets. The payment of CGT on residential property has now been implemented within the Finance Act 2019 and will come into force on 6 April 2020. While most of our attention may be directed towards what is happening with Brexit, it’s important to remember that the payment of CGT on residential property will now be due within 30 days of the date of disposal – much sooner than before. While the Act refers to the date of disposal, this is, for CGT purposes, in most cases the date of exchange of contracts. However, in this case it means 30 days from the date of completion – the date when the monies move between the parties.
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If you are therefore considering disposing of a property, it will be useful to work with your advisers so that a fair assessment of the CGT position can be made. If you are in the selfassessment regime, the gain will still need to be included on your self-assessment tax return. This will enable the actual tax position to be finally concluded, remembering that if you dispose of another asset in the year that produces a loss, it can be deducted from the gain to work out your overall CGT liability. It is useful to note that the payment of CGT is only an interim payment, but even so, the more accurate you can make the payment, the less funds HMRC will be sitting on until the final liability is confirmed. Going forwards, if you are planning any sale of a residential property, it would be a good idea to get in contact with your adviser early, to plan your strategy for making the tax contribution.
Possible IHT changes for main residence and APR A recent publication from the OTS sets out possible changes for a future finance act and IHT treatment. While this is ring-fenced as ‘possible’, it’s worth considering some of the genuine changes being introduced very soon in connection with CGT.
Deemed period of occupation
Rural Insight Rural. Edition Summer 1, 2019
The first change which may actually take place is the reduction in the ‘deemed period of occupation’. This is normally associated with people who are in the process of selling their homes and have already moved into their new home, while they are waiting to sell their old one. Principle Private Residence (PPR) relief provides exemption from CGT when you sell a property that is, or has been, your main residence throughout your ownership. Final period of ownership relief historically provided PPR exemption for the last 36 months that you owned the property, regardless of whether you lived there or not. So, for example, if the house was empty for 12 months while you were trying to sell it, or it had been rented out for the last three years before you sold it, then you would qualify for PPR relief from CGT for up to 36 months – known as the deemed period of occupation – as long as the property had been your main residence at some point during your ownership. That 36-month deemed period of occupation was cut to 18 months in April 2014; now the government is proposing to cut it again, down to nine months, from April 2020. It’s important to recognise that this is not a long period of time, particularly if we are coming to an uncertain economic phase where house prices could be affected, and selling your only, or main, residence could potentially take longer than usual.
“…there could be a significant change to Capital Gains Tax (CGT), main residence and Agricultural Property Relief (APR).” you are still struggling to sell it in 12 months’ time, the PPR relief will only apply to nine of those 12 months. Any gain resulting from the other three months will be apportioned and could start to become taxable. As part of being prepared for the future and looking at many of your farming businesses, if you do have assets that could qualify for the only or main residence relief, along with assets that currently qualify for APR, this may now be the time to talk to us to see whether gifting assets to the next generation under the current regime may be worth sensible consideration, rather than waiting to see what any new regime will bring into play.
What this means is that if, after moving out of your house,
Continued on next page 9
Think Tank
Possible implications for farming structures and land ownership Farming businesses are very heavily asset based. Whether you are an owner-occupier or a tenant renting from a landlord, in addition to adapting to meet the changes coming about with Brexit it’s also important to factor in the possible implications of the OTS report, which may herald future changes to IHT and CGT. For landlords, changes in APR – particularly a reduction in relief rates – could see land attracting a tax charge which may require you to raise cash by reducing holding sizes. For owner-occupiers, one common theme is that the farm is part of the business assets for many farming structures, since the leading case of Farmer back in 1999. As long as the business ‘in the round’ is considered to be ‘wholly or mainly trading’, then Business Property Relief (BPR) can be available on the value of the interest held in a business (including a share in a partnership), or the share capital of a private limited company. Farm property held within the partnership structure (including cottages and farm buildings which may generate rental income) would also form part of the business interest, and qualify for BPR. The Farmer case highlighted the fact that where farms had historically included cottages as part of the overall assets, but these properties had ceased to become necessary for housing employees of the business, they could still qualify for IHT relief as part of the overall business interest. This is despite the fact that APR on them would be lost as soon as the employee moved out and the property was used for non-agricultural use.
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One of the comments in the OTS report is the alignment of IHT with CGT, with the result that the current ‘wholly or mainly’ test of 51% trading could require the trading activity to be at least 80% or more. This could become a critical issue because, as margins and farm incomes come under pressure with reduction in farm gate prices and the potential loss of farm support, businesses could suddenly fall foul of obtaining the relief. With BPR, however, it is either full relief or no relief. On a positive note, for those thinking of gifting property away – currently a Potentially Exempt Transfer (PET) for IHT purposes – the existing requirement to survive the date of gift by seven years for the asset to avoid being brought into the overall final IHT calculations could drop to five years. We could be seeing a significant change in the future fiscal policy of the country and the need to raise tax revenue to support pledges made. So it’s important that you keep in contact with your trusted adviser to ensure that you are fully abreast of changes that could, ultimately, affect your business structure, and your future plans for succession and growth of the business.
Paul Neate and Laura Wylie
Rural. Edition 1, 2019
“We could be seeing a significant change in the future fiscal policy of the country�
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Farming & Financial Technology
Rural data: AHDB - making the best use of benchmarking As financial experts we support our clients to make the best possible use of technology. We also encourage them to consider how they can make the most of all the information they record on their farming software. We asked Philip Dolbear, Knowledge Exchange Manager from the Agriculture and Horticulture Development Board (AHDB), to explain why benchmarking should be a part of all farming businesses and how Farmbench can help with this. Many farmers acknowledge that they have to understand their business and be prepared to make big changes if the family business is going to thrive in the future. But the devil is in the detail, and farmers need to make lots of smaller decisions which ultimately affect how successful the overarching plan is. This works best by focusing on the factors that you can control in a fluctuating market. So have you put that important information down on paper? Do you have a good idea of the crucial numbers, or are you doing a good job without knowing your true cost of production? Benchmarking can help with this. The actual process of benchmarking is not only important in enabling farmers to understand their costs better, but can also bring huge benefits by allowing comparison with other farmers’ performance.
weaknesses within a farm business. It is funded by the AHDB levy and is free to use. However, there’s no point pretending that benchmarking is really simple. It takes time to become comfortable with using the system. But we are on hand to support you through the early stages; we see it as time well spent. To make sure your farming operation is as profitable as possible, at some point you will have to look at your business and understand how it’s performing. With all the uncertainty around agriculture at the moment, there is no better time to do that than now. For full details on Farmbench, visit ahdb.org.uk/Farmbench.
Philip Dolbear Knowledge Exchange Manager Agriculture & Horticulture Development Board philip.dolbear@ahdb.org.uk ahdb.org.uk
Farmers are all different – sheep, arable, sucklers or dairy, organic, intensive – but that doesn’t matter. What they are all striving for is profitability. Benchmarking enables you to compare results (anonymously or not) to farms with similar enterprises, allowing farmers to improve individual business performance and manage many of the challenges facing the sector, such as price volatility, economic uncertainty, and Brexit. Farmbench is an easy-to-use online benchmarking tool for farmers and growers that helps to identify the strengths and
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Old Mill will be working with AHDB on their strategic farm projects, helping farmers understand their business properly. For more information, see our events on p34.
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Farming and Financial Technology
So you’re using Xero – what happens now? Since HMRC’s Making Tax Digital was implemented in April 2019, you will be well aware of having to go online to submit your VAT. You may think it’s a pain because it means completely changing your brilliant Excel and invoice procedure. You have also had to make time to learn a new skill or pay a bookkeeper more money to submit this for you. It may seem like you’re spending more time in the office, and less time out on the farm. So do you wonder, why can’t it all have stayed as it was?
If I told you Xero could offer you the following, what would you say?
Change can be unwelcome at times, but let me assure you, there is light at the end of the tunnel. As with all new things, it takes getting used to and we are at the stage of implementation where everything seems different and a bit difficult. So, let’s walk through how things are going to get easier from here on in.
• See what you have paid to a feed company over the past year, including type of feed and amounts
Let’s start with where you are now: you, or your bookkeeper, enter invoices on Xero and submit them for VAT. That’s it, same as before but online. But what if you take Xero to the next stage? What if I told you that Xero and the whole Cloud accounting landscape is about putting business owners back in control? The bookkeeping function of the future will become much more than just data entry, it will be about interpreting data in real time so that you can make more informed decisions about your business.
• You can track your different farming enterprises to see your current status at a glance • How about putting a forecast budget into Xero and seeing how you are performing against it each month?
• What about a breakdown of last month’s outgoings to check you paid your contractor correctly? • You can easily check your bookkeeper has the allocated all the expenses to their correct coding • The bank manager is coming tomorrow, but don’t worry, Xero will show you your current bank position • Then there’s the farm consultant who would like to drill down into aspects of your business; Xero can help • What about an instant report of who you owe and who owes you? That’s right. Xero can do this too Xero is so much more that just a bookkeeping service. It’s a gateway to understanding your business better. We have seen the success of Xero and the benefits it can bring to many of our clients who are already using it. If you would like to know more about the reporting functions of Xero, please get in touch.
Ben Carter
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Rural. Edition 1, 2019
“Xero and the whole Cloud-accounting landscape is about putting business owners back in control.�
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News
“The question is, who is entitled to the value of the tenancy if it was surrendered?�
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Rural. Edition 1, 2019
The Farm Tenancy – is it an expense of the business? Most farming businesses evolve over time and it is often quite common to see them incurring similar expenditure year-on-year. There’s a natural presumption on the part of proprietors that the expenditure running through a set of business accounts is an allowable expense where incurred for the purposes of the farming business. However, in some circumstances it raises the question of what is the most appropriate treatment of that expense? One area where this issue can arise involves rent paid under an Agricultural Holdings Act (AHA) tenancy, or improvements carried out to the property. Many tenancies in family farming businesses were created under these rules as it eased the Capital Transfer Tax burden, by devaluing the farm on which the tax applied. To achieve this, a farmer would take on a partner, say spouse, son or daughter, after taking the farm off the business balance sheet. A tenancy would be created, and the partnership will pay a rent to the land-owning partner. The farmer would be the landowner and one of the tenants with the other partner, or partners, would be the other joint tenants. If, for example, this was a farmer bringing his son and wife into partnership with him, then when the original farmer passed away, this structure would roll on to the next generation. The farmer’s widow may now be the landowner and the grandchildren may have joined the partnership. As a result, the tenants may now only be the widow and the son. However, joining the partnership does not enable the grandchildren to
also become the tenants, unless the current tenants (with landlord consent) assign the tenancy – which will be a Capital Gains Tax event. In some cases, partnership agreements can stipulate that the tenancy will be held in trust for the farming partnership, so the traders can quite legitimately feel that if an expense is paid, such as the rent or putting up a building on the tenanted farm, this will be an expense of the business. Often the rent will appear as a deduction from profits in the accounts, and a tenant improvement will appear on the balance sheet and it would be a cost burden shared by all the partners. If the tenant is one named individual, for succession purposes a landlord would only consider a suitable candidate who was a close relative of the tenant. The remaining partners in the farming business may wish to carry on farming the land on the demise of the tenant but they may not have the right to succeed. When the business has continued to pay the rent on behalf of the tenant and incurred improvements, there could be some value that attaches to the other members of the partnership even though they may not be the legal tenant. Should, in fact, the rent and improvements be charged to the tenant alone and not to the partnership? There is also the question of Value Added Tax (VAT). Where the business incurring the expenditure receives
invoices made out to the business name, you would naturally wish to recover the input VAT. In circumstances where perhaps the landlord stipulates the tenancy must not become partnership property, and therefore the tenancy only rests with the tenant, then should that VAT be recovered if the expense is the responsibility of the tenant (one individual) he would not be registered for VAT in his or her own right. Where the landlord was trading in partnership on 10 March 1981 then they may be eligible for the ‘working farmer’ relief, thus enabling his estate to be eligible for 100% Agricultural Property Relief on the value of the tenanted farm. When the property passes to the next generation (not spouse) after 10 March 1981 the relief falls to 50% for the new landlord, even if they were a partner before 1981. The introduction of the Structures and Buildings Allowance also raises the question of who is eligible to claim this new allowance? It’s clear that, as businesses evolve over time, what might have been the correct treatment initially may no longer be the correct treatment now. In such circumstances careful consideration of the facts is essential, and it’s important to review these aspects with your Old Mill adviser.
Paul Neate
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News
Tax Relief on woodland could be more attractive than you think It’s fair to say that the woodlands activity on a farming enterprise is often overlooked in terms of accountancy and tax. However, with the increased commercial potential of woodland combined with the existing tax advantages, many farmers are having to question the current and potential usage of the woodland included in their farm. Agricultural land values in the South West have been in and around £7,000-£12,000 per acre, so in most cases planting this land to woodland has previously been unattractive for farmers, as average land values for woodland have been in the region of £2,500-£5,000. With increasing incentives to reduce our environmental impact, the grants and tax reliefs for owning and running a woodland are becoming more and more attractive. This, in turn, is also increasing the land value for woodland areas, which has soared over the past few years. There are a multitude of grants available for planting agricultural land to woodland, with these being up to as high as 80% of the cost of planting the trees, as well as grants being available on any fencing that is done to enclose the woodland area.
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Here at Old Mill we have seen these grants being utilised, supporting a farming client who has created woodland using this grant and only incurring 35% of the costs to establish the trees and the fencing. In the current economic climate, with the disappearance of the Basic Payment Scheme (BPS) and the uncertainty around how the main farming grant will be replaced, there is the question as to whether woodland may end up receiving even more grants than it already does. There has been speculation for some time that grants are likely to become based more and more on environmental grounds, and farmers will have to do more in these areas to receive the funding. Woodland also has the additional benefit of qualifying for Agricultural Property Relief (APR), and once owned for two years also benefits from Business Property Relief (BPR). Compared to other diversification methods, such as residential and commercial lettings, office blocks and farm shops (which all qualify for APR), diversifying into the creation of a woodland does not affect any Inheritance Tax (IHT) reliefs for the farm. Instead it will more than likely
increase the agricultural activity of the farm and the likelihood of gaining APR. Once the timber crop is established, the sale of any timber currently benefits from an exemption to Income Tax and therefore is not a taxable source of income. This does mean that costs associated with establishing the crop are also not tax deductible, but if this is operated at a profit-making level then the net outcome is a gain for the landowner in not having to pay Income Tax on their profits. Remember, in order for the reliefs mentioned above to be available, the woodland must be run commercially and cannot be solely used for recreational purposes. In this instance, commercial activity can be defined as forest schools, paintballing, ‘glamping with tree houses’ or maximising offroad driving. These can then also benefit from Holdover Relief, CGT Rollover Relief and Entrepreneurs’ Relief (ER) as long as the woodlands and the business within them are sold or valued as one entity, and the business that uses them qualifies for the CGT reliefs. Charlie Bowyer
Rural. Edition 1, 2019
“The grants and tax reliefs for owning and running a woodland are becoming increasingly attractive.�
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Financial Planning
Possible changes for Inheritance Tax rules The detailed report from the Office of Tax Simplification (OTS) – Simplifying the design of Inheritance Tax (IHT) – is a lengthy read at 107 pages! If you don’t fancy a bit of bedtime reading then don’t worry, we’ve pulled out some of the highlights relating to IHT. Lifetime gifts We spend a lot of time talking to clients about the available gift allowances, with cashflow planning helping to highlight what someone can or cannot afford to give away. It’s apparent however that the various gift allowances are confusing. There are lots of types of ‘gifts’ – annual, small, wedding, gifts out of income – and there is a suggestion to do away with these and have a single annual allowance.
The seven-year rule It is relatively well known that large gifts can be made, as what is known as a potentially exempt transfer (PET), the donor must survive for at least seven years. Of course the rules are much more complicated than that, but the general understanding is that such
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gifts will have an impact on IHT if you die within seven years of giving them. The report proposes that this sevenyear term is reduced to five years. A common issue with estate planning is people leaving it late in life to start IHT planning, by which point seven years is a potentially long time to survive, and therefore carrying the risk that larger gifts will ‘fail’. As such, reducing the time by two years would be a welcome move. Tied to the above is the idea to remove the taper relief. We often speak to people who get confused by the taper, not understanding that it is a taper on the tax due rather than of the amount gifted. Taper is only available when the gift (or cumulative gifts in the previous seven years) is over the nil rate band, currently £325,000. There is also what is known as the ’14-year rule’ which is even more
confusing! The idea is to scrap this, which would certainly make tracking gifts and establishing any tax due a much simpler task.
Capital Gains Tax There are a number of interactions between Capital Gains Tax (CGT) and IHT, which make planning essential but which can cause surprises to those unaware. The worst-case scenario for many would be gifting assets in their lifetime – thus triggering a CGT liability – and then passing away within seven years of that gift, and paying (additional) IHT as a result of the failed PET. It is relatively well known that there is a capital gains ‘uplift’ on death, even in the common scenario whereby assets are simply passed to a surviving
Rural. Edition 1, 2019
spouse. This can lead to situations where individuals hold onto assets in later life knowing that will be more tax favourable than gifting during their lifetime, which could then lead to a significant CGT liability. Once the asset is passed through the estate, the value at death becomes the new ‘base cost’ and gifting or selling the asset may then be more tax favourable. This is particularly relevant where assets are passed to a surviving spouse (which is exempt from IHT), or where assets qualify for Business Property Relief (BPR) or Agricultural Property Relief. This can often lead to no tax – either CGT or IHT – being due, and is something that is proposed to change. The idea is complex and would involve something similar to holdover relief (a relief against CGT in certain scenarios), but this would need some careful drafting if it were to come into legislation.
Term assurance plans At present, if a life assurance plan is not held in trust it becomes part of a taxable estate. In a very sensible proposal, the idea would be that term assurance plans would automatically be exempt from IHT without the need for trusts, which individuals (and some insurance companies!) struggle to understand.
The Alternative Investment Market (AIM) shares AIM shares have become increasingly popular with investors, given that they attract BPR after two years of ownership. The report questions this, given BPR was originally designed to prevent smaller businesses being split up upon death (to pay death duties) – a valuable relief for families
to allow businesses to pass down the generations. However, with AIMlisted companies, the relief is slightly at odds with the original intention given investors are ‘removed’ from the business and act as a third-party owner. AIM ISAs (Individual Savings Accounts) have been available since 2013, and as such this area of investing has grown in popularity. This move would adversely affect a number of those who have sought the tax reliefs available from this style of investing. There would also be a knock on effect to the value of those AIM companies, so this would need to be carefully considered before any move could be put in place.
Stuart Coombe
“A common issue with estate planning is people leaving it late in life to start IHT planning.” 21
Financial Planning
Reviewing your personal finances – winter health check If someone knocked on your door every month and asked for £50 offering nothing in return, wouldn’t you ask what it was for? This could be happening to you. Throughout this winter we will be visiting clients to discuss their personal financial situation with regards to pensions, investments and planning wealth distribution for the future. With busy lives and a business to run, personal finances can often get overlooked, particularly when you are keeping a close eye on day-to-day farming matters. If you factor in the
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ever-changing tax landscape and our government’s need to realise money to keep this nation running, then it is now even more imperative to review and understand your personal financial affairs. Often a review and a focus on what the aims are for those arrangements can have surprising results.
Rural. Edition 1, 2019
“Reviewing financial affairs can also help to focus the mind on longer term goals and aspirations.”
Example 1:
Example 2:
• Have you borrowed more?
Mr Farmer saved himself several thousand pounds a year just by:
Mrs Entrepreneur recently worked out how to generate sufficient income to pass the farm onto her son while feeling confident she will still be able to support herself in later life. She now knows what income she can expect from her state and personal pension and has a plan of action.
• Have you had children?
• surrendering some ineffective investment plans • cancelling direct debits for insurance policies that were no longer needed • redirecting part of what they were saving into a more effective pension scheme. Reviewing financial affairs in both a personal and business context can also help to focus the mind on longer-term goals and aspirations.
If you are reading this and need a quick health check, consider the following: • Can you account for all payments made to insurance companies for life cover, pensions and investments? • Do you know if these loans are effective, suitable, and fit for purpose? Do you know the benefits that they may/will provide? • Have your circumstances changed since these plans were taken out? • Have you repaid debt?
• Have your children since stopped being financially dependent? • Have you married or divorced? • Has your business structure changed? • Has your financial position changed (in terms of income or net wealth)? • Are the plans cost effective – could you get a better or more effective deal? If you want to review your finances with an expert, please do get in touch. Reviewing financial affairs in both a personal and business context can also help to focus the mind on longer-term goals and aspirations.
Julia Banwell and Stuart Coombe
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Focus: Dairy Industry
Dairy farming – your tax planning options for 2019/20 Dairy farmers’ profits eased marginally in the year to March 2019, but should hold up reasonably well in the coming tax year. However, there have been some notable difficulties, which should be considered when planning for the year ahead. Net farm profits decreased by an average of 4% in 2018/19 – based on a preliminary sample of our dairy clients – as higher concentrate and input costs undermined solid milk prices.
The summer drought This had a massive impact on feed costs, particularly for farmers who traditionally rely on grazed grass, as they had to feed more concentrates to retain production levels. Purchased feed costs within the sample – with financial year-ends between December 2018 and March 2019 – were up by 23%. There was an associated reduction in contracting costs, because of less forage being cut, but the extent to which farmers replaced forage with concentrates will not only have an impact on the 2018/19 figures, but potentially 2019/20 as well. Many producers fed more to maintain
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production and fertility levels, but those who struggled to do so could see a hangover of poor health and fertility into the current season. That aside, the 2019/20 tax year is looking pretty positive, with global dairy production stuttering and giving some support to milk prices. Production conditions remain good in the UK, and spring calving herds in particular – which have already produced a lot of their milk for the year – will have benefited from reasonably firm milk prices.
So what does that mean for tax planning? Given the difficulties of forage shortages last year, many farmers put off spending on maintenance and capital items; investment runs on confidence and cashflow to a large extent, rather than profits. Many farmers will have been nervous
of making investments in 2018/19 because of worries about forage and the cost of feed. Hopefully the more positive outlook in the current year will see that reverse. With the potential for higher profits in the current tax year, it’s important to plan such investment at an early stage. Tax planning options shouldn’t only be considered just before the year-end – by that point it may well be too late to take beneficial action. Above all, having a good understanding of how tax and investment interacts with profits is a great help, particularly if you are a sole trader or in a partnership. Higher profits could mean sole traders and partners jump from the basic rate tax band of 20% into the higher rate of 40%, so it’s important to plan ahead to try and minimise the level of profits taxed at this rate. Producers often don’t fully take advantage
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“Production conditions remain good in the UK.” of the benefits of two and fiveyear farmer’s averaging, which is a particularly useful tool when profits fluctuate so much from one year to the next. Paying into a pension is another helpful way to keep profits below the 40% tax band, and is obviously beneficial for retirement plans in the years ahead. Structuring as a limited company continues to be another popular option, particularly where businesses are expanding, as the tax levied can be lower – although this will depend on your individual set-up.
The benefits of the Annual Investment Allowance Another way to minimise the tax spend – which could be particularly attractive this year after a period of uncertainty – is to spend out on maintenance or capital projects. Much of this expenditure can be immediately offset against profits, with the Annual Investment Allowance (AIA) now sitting at £1m a year. This means that qualifying expenditure on plant and equipment can be set against profits, up to the £1m threshold.
If you are considering investing in buildings then it’s useful to go carefully through itemised expenses and allocate as much as possible against the AIA. For example, milking parlours, silage clamps and slurry stores will all qualify, whereas the building itself will only be eligible for the new Structures and Building Allowance. This enables such investment to be written down at just 2% a year, so there is a big up-front benefit from allocating eligible expenses to the AIA wherever possible.
Andrew Vickery
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Focus - Dairy Industry
“Businesses that can generate a real-world profit will have the most opportunities going forward.�
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Rural. Edition 1, 2019
The Milk Cost of Production Survey 2019 Once again, in collaboration with The Farm Consultancy Group, we have been busy collating, analysing and evaluating our rural client data to provide you with a comprehensive and insightful breakdown on the state of the dairy industry. Below is a summary of the findings. In many ways the results of our 2018/2019 dairy survey hold few surprises compared to general sentiment on the ground. A reminder firstly of the basis for the survey, which is a comparison of farms with March year-ends who derive their income mainly, or solely, from milk sales. In order to make the businesses comparable, rents, interest payments, drawings and capital expenditure have been excluded from normal profit figures and a labour charge of £30,000 has been included for each full-time partner or director. The Basic Payment Scheme has also been excluded from the income figures. Depreciation is included. On this basis, the headlines are that, while milk output per farm has remained relatively level between 2017/2018 and 2018/2019, the costs of producing milk have risen with the overall effect that Comparable Farm Profit (CFP) has fallen from 5.9p/litre (£383/cow) to 2.69p/litre (£141/cow) between the two years. Despite lower milk output following the dry 2018 summer, the firmer milk price has offset that reduction in the results. On the cost side, it will come as little surprise that purchased feed costs are higher at £789/cow, up from £662/cow the previous year. Both the results of the survey and most conversations with producers would suggest that wherever possible the effects of the dry 2018 summer have been ring-fenced into the last financial year, with most producers incurring higher feed costs to maintain condition and fertility. As such, it is hoped that there will be a smaller hangover into the current 2019/2020 year than many would have anticipated. As usual, the survey also looks ahead at projections for the current trading year. Even half way through the year with a much better summer of forage production behind us, there
are arguably more uncertainties over profitability now than there were at the same point last year, in particular, taking into consideration the uncertain longer term effects of Brexit. Again, milk output is expected to be level with the previous two years with some key inputs (notably feed) expected to fall following better summer 2019 forage production. Factor in an expected fall in milk price year-on-year, coupled with better yields, could offset that drop. Overall, CFP is expected to rise by 0.71p/litre year-on-year to 3.4p/litre in 2019/2020 (a rise from £141/cow to £269/cow). As in previous years, perhaps the most interesting comparisons are between the top and bottom 10% of producers by profitability. Within the sample, the top 10% of producers achieved a CFP of £585/cow with the bottom 10% making a loss of £471, a variance of £1,056/cow. While there continues to be an exodus of producers from the industry, it is clear that there remains a great number of farms producing milk efficiently. While the most profitable producers do not necessarily come from any particular production system, it will inevitably be those businesses that can generate a real-world profit, taking into account rent, finance and labour costs, which will have the most opportunities going forward. The Milk Cost of Production Survey 2019 is out now. If you would like a copy, which includes breakdowns and analysis to help benchmark your own dairy farm enterprise, please contact us. Alternatively you can download the full brochure with breakdown and analysis by going to om.uk/dairy.
Neil Cox and Dan Heal
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Focus: Dairy Industry - Guest Spot: Clarke Willmott solicitors
Mandatory milk contracts: an end to unfair contract terms? Recent press coverage has focused on the possible future regulation of certain aspects of the dairy industry and the pros and cons of establishing a regime of mandatory dairy contracts.
Opinion is divided. On one side are the farming unions and the Groceries Code Adjudicator, pressing for urgent reform of the existing system. On the other is Dairy UK, which represents approximately 85% of milk processors in the UK, resisting change and arguing that greater regulation would result in increased market volatility and a reduction in competition.
contracts within a reasonable period. The perception in some quarters is that dairy farmers in particular are too much at risk and subject to unfair contract terms.
companies and/or their supermarket clients can seem something of a David and Goliath struggle.
George Eustice, Minister of State for Agriculture, Fisheries and Food, summed up this perception in January 2019 when he said: ‘All too often farmers are price takers – they are captives.’
Why now?
Why are milk contracts such a battleground?
In the UK there is legislation to help prevent consumers being taken advantage of, but there are few such statutory protections for business-tobusiness contracts that determine the relationship between farm and milk processors. The Unfair Contract Terms Act 1977 does apply to clauses which seek to limit or exclude liability in a business-to-business contract, but in general, it is up to the contracting parties to understand the terms and conditions to which they are agreeing. For small producers, any attempt to resist changes to contractual terms proposed by large scale processing
In part, the answer to this question is because there appears to be a pattern of unfair or unclear terms and conditions in contracts between the milk producers (farmers) and the milk processors and their customers. In particular, issues have arisen when a processor has unilaterally decided to vary the terms of an existing contract with very little notice. Faced with a significant price change or alteration of the supply terms, farmers have reported difficulty in terminating their
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In fact, arguments about how best to promote fairer supply chain relations within the dairy industry are part of a long-simmering debate. The existing Dairy Contracts Voluntary Code of Practice (VCOP) was intended to promote best practice and a standard of what is fair in contracts for the supply of milk. On its introduction in 2012, farming unions supported the idea of a voluntary code as the best way forward; but subsequent vicissitudes, the fact that not all UK processors signed up and continuing instances of bad practice subsequently shifted opinions. The background to VCOP was the EU CMO Regulation (1308/2013) (CMO), which gives Member States discretion to make the use of mandatory written contracts between milk producers
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and processors obligatory. The EU regulation provides: • contracts should have transparent pricing • pricing should be fixed or linked to market signals • a minimum contract length (e.g. six months). In Spain such compulsory contracts were introduced about six years ago; initially there was hostility but subsequently farmers and processors have reported improved price stability and transparency.
What happens next? A Defra consultation on dairy contract regulation is expected and there are proposals to select elements of CMO to be enacted into UK law. However, uncertainties over Brexit have delayed matters. Over a year ago the National Farmers’ Union update stated: ‘As we leave
“It’s time for buyers to look to the future, operate as proper commercial businesses and deal with farmers fairly.”
the EU, the UK dairy market needs to be commercially focused, innovative and competitive. We’re not going to get a properly operating dairy market while buyers live in the dark ages using unfair contracts to manage risk. It’s time for buyers to look to the future, operate as proper commercial businesses and deal with farmers fairly. That’s all we’ve ever wanted on dairy contracts – fair terms.’
For further information about this article and commercial or contractual matters generally, please contact Amy Peacey (nee Kerr), Senior Associate.
Amy Peacey Senior Associate, Clarke Willmott Amy.Peacey@clarkewillmott.com 0345 209 1329
We await the outcome of the consultation when it happens.
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Focus: Dairy Industry - Client Case Study
Helping Woodbridge Farm and Dorset Blue Vinny build a future proof business Old Mill clients and owners of Dorset Blue Vinny, the Davies family, discuss the key points in future proofing their dairy farm. Who are they? Dorset Blue Vinny is a family owned cheese making business based near Sturminster Newton in Dorset; they produce a traditional semi-hard blue cheese made from pasteurised, handskimmed cow’s milk. The business was established by Mike and Christine Davies in the early 1980s and the Davies family have been dairy farmers for over 50 years. Like many farmers across the South West, they saw the opportunity to diversify into the food and drink industry, starting with the resurrection of the 300-yearold recipe for Dorset Blue Vinny. The business is located at Woodbridge Farm and now is run on a day-to-day basis by their son Richard and their daughter, Emily. Emily is also heavily involved in managing their second business, The Dorset Blue Soup Co. to produce popular handmade chutneys and soups.
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Most impressively throughout their evolution, Woodbridge Farm has continued to be a working farm and home to over 270 Holstein Friesian cows, which continuously produce milk for their popular cheese. The farm has been steered to success by two generations.
What makes them successful? By investing in their product, listening to their customers and making the shift over to Cloud-based accounting, they are in a strong position to remain competitive. They have embraced diversification and have been smart about it; utilising their resources, tapping into a niche market and building strong relationships with suppliers and wholesalers.
Overcoming challenges: the need to diversify As well as being cheese makers, they manage a working farm and, consequently, there are different cost centres that need to be carefully monitored. Having diversified the farm business, the need soon became apparent to bring together both the farm and the cheese making businesses, ensuring they both run side by side in a more streamlined way. ‘Working closely with the team at Old Mill, we identified that Xero’s Cloudbased solution was the way forward,’ said Emily. ‘The move to Xero was a massive transition for us as there’s a lot of paperwork generated because of the cheese sales, so we needed to set up all the cost centres and systems. We can now pull the right information on a monthly basis to provide us with much better insights to be able to run the business.’
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“The Davies’ story shows how a traditional farming business can diversify to secure the business for generations to come.”
The future
How has Old Mill helped?
As the business expands, one of the biggest challenges they face is around the transition to capture meaningful, usable data that can be used to manage the farm’s performance on a day-to-day basis. And, while the Dorset Blue Vinny brand has a strong heritage, the family recognise the need to continue to innovate wherever possible. This includes thinking about ways in which they can expand their product range or broaden distribution.
‘What attracted us to Old Mill was their rural and food credentials,’ added Richard. ‘They are known in the agricultural space across the West Country, and they have genuine food and drink specialists who understand the entire supply chain. We can readily plug into that expertise.’
Richard said: ‘As a family business you tend to find yourself wearing a lot of hats, so it’s essential to have an adviser like Old Mill who knows our industry and is a good sounding board. We also need to continue to be progressive in our outlook, and this means being open to things like the shift to Cloud-based accounting in order to remain competitive.’
The Davies’ story shows how a traditional farming family can diversify to secure the business for the next generation. They have utilised the skills and interests of all family members, they constantly review the business for efficiency and financial security, and they embrace opportunity. If you would like to know more about how we can help you to diversify your farm, or have any questions relating to this case study, please get in touch with one of our financial experts.
www.dorsetblue.com
Andrew Vickery
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Recruitment
We are recruiting (but keep your Wellies on, you’ll need them!) With the changing landscape in farming presenting us with advanced technology, ever-changing market conditions, new enterprises and farm diversifications, there has never been a more exciting time to enter the industry. But with this new environment farmers require ever-greater business knowhow, financial awareness and market understanding. This is where our rural team come in. There are many career routes you can take within Old Mill, from bookkeeping to back-office work to advisory roles within accountancy, tax and financial planning. Whichever route suits you, they all make a difference to the success of our clients’ businesses. At Old Mill we don’t just love farming, we live and breathe it. Whether it be
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attending country shows, meeting the next generation of farmers at events or visiting farms across the South West, we are doing so much more than just crunching numbers. An average day will find an Old Mill rural adviser on the farm. However, instead of milking cows or driving the tractor, they will be working out annual accounts, succession plans, cashflow, profit and loss, and using our data to help the farmer achieve more from their business. If you want to stay in the farming industry then why not consider becoming a rural financial expert?
Graduate programme Our graduate programmes are as challenging as they are fun. Learning on-the-job as part of our team, you will enjoy a variety of training courses, have the opportunity to make a positive impact every day, and study towards fully funded professional qualifications. You will get out of our programmes what you put in, developing the skills you need to enjoy a rewarding career as an accountant, financial planner, business adviser or tax planner.
School leavers We are passionate about nurturing bright talent and helping ambitious school and college leavers to realise their potential and grow their careers. If you have strong A Level results and the drive to succeed, you can take your career in many different directions at Old Mill. We will provide you with all the training and support you need to develop your skills and achieve your goals. Here, you will be more than a number. We will tailor our training and support to you. Whether you join one of our development programmes or take on a trainee role, you can look forward to exciting challenges, new experiences and lots of personal and professional development. If you are committed to our firm and progressing your financial career, you will learn on-the-job while earning a salary and studying towards fully funded professional qualifications.
Quality over qualification We are always looking to enhance our business with bright candidates who showcase enthusiasm and knowledge of the rural and farming industry. If you
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feel you have the capability to mix Wellies with business then do contact us for an informal chat. Our website is packed full of support and insight; check out our latest job opportunities and see if Old Mill is the place for you by going to om.uk/careers .
Success story – Emma Cotton Emma joined the Old Mill rural team in September 2019, having previously spent a 12 month placement with us. With a farming background and an aptitude for farm business theory, Emma was the perfect fit for Old Mill, the work required and our values
and beliefs. During this time, Emma achieved a First in her Agriculture BSc Hons degree, and received the Worshipful Company of Farmers Prize for a final-year student with the highest mark obtained for an Honours Research Project in Agriculture, for her project titled How do dairy farmers define business resilience? She was also awarded the Royal Agricultural Society of England’s Best Agricultural Student prize, for both academic achievement and practical application, and won Alltech’s prize for
the highest mark in Animal Production Systems. ‘By working for Old Mill, I continue to be involved in the industry that I love,’ said Emma. ‘They give me the opportunity to specialise in farming and use my professional training to help and advise farmers.’
Want to begin your career with Old Mill? Go to om.uk/careers to view our latest vacancies.
“By working for Old Mill, I continue to be involved in the industry that I love. They give me the opportunity to specialise in farming and use my professional training to help and advise farmers.” Emma Cotton 33
Events
Old Mill Events, Seminars and Focus Groups We have a number of industry specific events coming up in the next few months. Have a look below to see what may be of interest.
Farmers Meetings Thursday 21 November 2019, Exeter Devon Hotel Tuesday 26 November 2019, Taunton Rugby Club
AHDB Strategic Dairy Farm Finance Focus
Old Mill, in association with Ashfords Solicitors, Savills Land Agents and Agricultural Mortgage Corporation (AMC), will present ‘Deal or No Deal’, an evening of advisory talks for farmers on the current Brexit agricultural landscape.
February 2020 (further details to follow)
Open to all farmers and free to attend, please email marketing@om.uk to register.
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A day spent with AHDB at their Wiltshire Strategic Dairy Farm discussing options for future business decisions and ways to maximise profitability and understand what makes a highquality, successful dairy farm. For more information contact ben.carter@om.uk.
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Rural Client Focus Groups – client exclusive Winter 2019 and Spring 2020
Old Mill offices (Exeter, Melksham, Wells and Yeovil) As part of our service to our clients we will be producing free client exclusive, topic specific focus groups. We will explore each topic in detail with the aim of providing insight and actions for the farming business. Below is a list of our seminars:
Brexit and the current political landscape With so much uncertainty on the future of food and farming, this session will provide you with a checklist of certainties in order to future-proof your business and family finances.
Farm tenancies Relevant to clients who operate, or are thinking of operating, with an Agricultural Holdings Act, Farm Business Tenancy or Assured Short Term Tenancy. This session delves into what you need to consider with tax and structure.
Contract Farming Arrangements This session is aimed at clients who operate, or are considering setting up, a Contract Farming Arrangement and want to understand the tax implications surrounding this.
Land development Want to understand more about the financial aspects when developing land or selling land for development? Along with the relevant tax considerations, this session will discuss Option and Promotion Agreements and how to safeguard your financial decisions.
Milk Cost of Production Survey – dairy farmer focus Aimed at our dairy farming clients, we will look further into the Old Mill and The Farm Consultancy Group Milk Cost of Production Survey 2019, with the aim of providing further insight into the figures for comparison with your own farming data.
Estate planning, death and taxes Delving into the world of trusts, beneficiaries and Inheritance Tax, this session aims to give you practical advice on how you might mitigate tax on your estate to the benefit of your successors.
Family farm succession A session exploring the financial aspects of planning for succession on the farm. Find out what you need to consider when handing over the business.
Later life planning This seminar is designed to give an overview of what is required and whether you have the financial resources to fulfil your care needs for later life.
Next generation focus – succession A session exclusively for the successors of the farm, which will give them the opportunity to ask questions directly to our expert advisers about their plans for the future.
Next generation focus – accounting for farming Designed for the young farmer who wants to understand the basics of farm accounting, ready for when they are given more responsibility for the farming business.
Making the most of Xero for the farming business Aimed at clients who are using Xero to submit their VAT, now is the time to make Xero work for you. This session will showcase how to use the reports section, set budgets and create enterprises.
Using Figured software for farm budgets, forecasting and scenario planning This session will provide an overview of Figured, a new piece of farming management software. Figured takes information directly from Xero in order to construct and review the farm budgets, generate cashflow forecasts and examine scenario planning. You can find out more by going to figured.com.
To register your interest in any of the above focus groups, please contact marketing@om.uk. If you would like to learn more about any of our events or services from Old Mill please do get in contact.
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Contact Exeter Leeward House Fitzroy Road Exeter Business Park EX1 3LJ +44 (0)1392 214635 Melksham Wessex House Challeymead Business Park Bradford Road SN12 8BU +44 (0)1225 701210 Wells Bishopbrook House Cathedral Avenue BA5 1FD +44 (0)1749 343366 Yeovil Maltravers House Petters Way BA20 1SH +44 (0)1935 426181 Also at Frome Livestock Market, Standerwick The office is manned on livestock market days with someone on hand to answer queries.
The content of this newsletter is for general information only. It should not be relied on and action which could affect your business should not be taken
enquiries@om.uk | om.uk
without appropriate professional advice. Please contact your usual Old Mill contact or local Old Mill office.