Tax Allowances for Caravans Used in the Business

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You can claim tax relief, known as capital allowances, for plant and machinery that you keep to use in your business. Assuming all criteria are met, the cost of items such as tools, equipment, desks and computers can be offset against profits in the year in which they are incurred. This is subject to the annual investment allowance which is currently £200,000.

You cannot however claim capital allowances for assets in or on which the business is carried out. This includes land, buildings and other related structures.

This distinction is important when determining whether capital allowances are available for something such as a caravan. Although a caravan would typically be considered an asset in which the business is carried out, if it is intended to be moved around in the course of the qualifying activity then there may be an opportunity to claim capital allowances. HMRC guidance, however, focuses on caravan sites so there is some ambiguity with regard to the use of caravans in other trades.

Somewhat by contrast, farmers can claim tax relief on a caravan used to house a farm employee, even if it occupies a fixed site and is used solely for residential purposes (which could make for a few happy campers). However, if you are going to make such a claim, it is advisable to check  with your tax advisors beforehand in regard to your specific circumstances.

If you have any questions or comments please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

 

HMRC Agricultural Compliance Checks

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In the rural sector, employers are being urged to check that they are paying the correct minimum wages rates where both the Agricultural Minimum Wage and the National Living Wage apply.  HMRC has launched a programme of compliance checks to ensure the correct rates are being paid and can ask to see any associated records.   This applies to workers in horticulture, agriculture and could include other areas such as, for example, beaters, housekeepers, temporary staff and casual labour.

The Rules

Wales – Agricultural workers must be paid the higher of the Agricultural Minimum Wage or National Minimum Wage

England – Agricultural workers must be paid at least National Minimum Wage unless they signed a contract before 1 October 2013 which entitles them to Agricultural Minimum Wage.

Agricultural Minimum Wage is dependent upon the employee’s job grade and category. Further information can be found on the HMRC website.

Exemptions

Family members who live at the home of the employer and help out with chores or participate in the running of the family business do not qualify for the minimum wage.

However, if your business is a limited company this is a separate legal entity and cannot be considered to have a family or a family home so the minimum wage rules still apply to all employees.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Are you a farmer or a landlord?

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There has always been uncertainty over whether a landowner is a farmer or a landlord for tax purposes. There has however, been a recent useful decision by the First Tier Tribunal in the case of John Carlisle Allen which has helped to clarify the capital gains tax position (and the valuable entrepreneurs relief/rollover relief ) on grass letting, and what constitutes trading or investment activities by the landowner.

The facts of the case are:

  • Mr Allen and his brother grew the grass which was eaten mainly by Mr Crooks’ stock.
  • The Allens maintained the rights to lairage – temporary housing of animals on the land, supplied fertiliser when needed, maintained fences and drainage, supplied water and engaged a Contractor to cut the weed and hedges.
  • Mr Crooks could graze stock or take silage off between 17 March and 1 November and claim the subsidy for part of the time. He was not permitted to spread artificial fertiliser on the land, only farmyard manure. He had to control his stock and repair any damage caused by them.
  • The Allens occasionally supplied fertiliser free when the grass was getting weak, but this did not happen every season.
  • The ground was left to recover over the winter for fear of poaching.
  • The £1,000 paid a year was described in the agreement as a “licence fee” rather than rent.

The Judge found in favour of the taxpayer. He stated that the Allens had demonstrated an awareness of the land and its condition and the need to maintain it. The actions were not one of a property investor. Although Mr Crooks was taking the grass, it was the Allens who were farming the land by managing it in such a way as to maximise the grass crop produced and maintain its quality. Their input into the husbandry of the land was critical.

So what can landowners take from this case if they wish to be classed as a farmer rather than a landowner?

  • Keep a diary or record of what you do from day to day, month by month.
  • Keep clear detailed notes to record the work undertaken and management carried out.
  • Carry out soil testing every few years, and take advice on applying the right quantities of lime, phosphate etc., to correct soil deficiencies, minimise wastage and maximise the crop.
  • Carry out weed control.

There are, as stated above, valuable capital gains tax reliefs which apply to a trade but not to the letting of land. Make sure you are in a position to utilise them if needed.

For further information please contact the tax team at Green & Co on 01633 871122.

HMRC, The Dairy Farmer & The Disallowed Loss

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The recent case of B and R Scambler v HMRC (TC4842) reinforces HMRC’s refusal to accept farming loss claims where they deem that the farm is not being run on a commercial basis. And there are many cases of this nature going to Tribunal.

Assuming all criteria is satisfied, self-employment losses can be offset against other income received in the year. This is known as sideways loss relief and is available to Farmers.

This loss relief is unavailable however, where a farming business has made losses in five consecutive tax years, known quite succinctly as ‘the Five Year rule’. In this instance the farmer cannot offset losses incurred in the sixth or subsequent years until there is another profit, unless he can show that “a competent person carrying out the activities at the beginning of the prior period of loss could not have reasonably expected the activities to become profitable until after the end of the current tax year.”

Mr & Mrs Scambler, who made losses from 2005/06 through to 2010/11, could not identify a specific reason why profits could not be made during these years, despite running the business competently. Their claim that the milk price was unpredictable was not thought to be sufficient justification, and they were therefore denied sideways loss relief for 2010/11.

If you would like to discuss this further please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Tax Relief for Farmhouse Renovations

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It is very likely that at some point your farmhouse and other buildings used in the farming business will require refurbishment, and it is important to be aware that whereas some repair expenditure can be relieved in the year it’s incurred (subject to a disallowed proportion for private use of buildings), alterations and improvements cannot. This is known as capital expenditure.

Repairs carried out which simply restate the building to its original condition are typically allowable as revenue expenditure. On the contrary the cost of replacing, improving or altering an asset is normally capital expenditure and can be relieved on disposal of the asset.

These rules extend to rental properties and in addition there are rules for rental properties purchased at below market value because they require extensive work in order to be habitable.

‘Capital versus revenue’ expenditure is a highly contentious issue and many cases have gone through the courts because HM Revenue & Customs and the taxpayer have disagreed over the tax treatment.

If you have any queries about taxes and the farming business please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

The Farmer and The Five-Year Rules

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There are two five-year rules that every farmer should be aware of, both of which affect the tax they pay. One has been in place for quite some time and the other was introduced in April 2016. Here is a quick re-cap of both.

The ‘five year loss’ rule seeks to ensure that farmers claim losses only when they are operating a commercial business (as opposed to a hobby). Self-employment losses can be offset against other income in the year in which they occur, or they can be carried back and offset in the previous year. However, a farmer cannot use a loss in this way if he or she has also made losses in each of the previous five tax years.

Farmers will be well versed in farmer’s averaging. Historically this allowed them to average their profits over two years in order to reduce unpredictable tax bills caused by fluctuating profits. Farmers can still average over two years; however, as of the 2016/17 tax year, they can also elect to average their profits over five years. So they now have three options in determining taxable profit.

There we have it in very brief form – a bunch of fives and a high five!

If you’d like any more information on this or any other tax-related farming queries, please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

 

Your Redundant Farm Building could be Restricting your Inheritance Tax Relief

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Agricultural Property Relief (APR), if obtained, allows an individual to pass on agricultural property, either in their Will or during their lifetime, free of Inheritance Tax (IHT).

Business Property Relief (BPR) reduces the IHT payable on a wider class of qualifying business assets when they are left in a Will or passed on during lifetime.

In order to qualify for APR farm buildings must be occupied for the purposes of agriculture – derelict buildings will not qualify for the relief. Similarly, if the property has not been used wholly or mainly for business purposes in the two years prior to the transfer, BPR will not be secured.

It’s important for all Farmers to consider their exposure to IHT and if farm diversification is currently being pursued, i.e. alternative uses of agricultural land and buildings, then it’s wise to act sooner rather than later.

If you would like further advice on Inheritance Tax please contact Green & Co on 01633 871122.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Tax Allowances on the Farm

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Certain plant and machinery can qualify for what’s known as Annual Investment Allowance (AIA), which allows businesses to claim for the cost of the new asset (up the specified threshold) in the year of purchase.

The current Annual Investment Allowance is £200,000 (in the year to 31 December 2015 the limit was £500,000) and it’s expected to stay at that level under the current Government. Plant and machinery that doesn’t qualify for AIAs can have writing down tax allowances of 18% or 8% (current year rates).

HMRC have accepted that silage clamps and slurry pits qualify as plant and machinery, which is of particular importance to farmers due to the Nitrate Vulnerable Zone Legislation.

There are many intricacies within this area of tax so it’s good practice to check with your tax adviser whether new assets or work qualify as plant and machinery in order to maximise AIAs.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

The Farmhouse – Not Just Where The Farmer Lives!

Traditional farmhouse in the North York Moors, Yorkshire, UK.

They say an Englishman’s home is his castle, but in the case of a farmer, his home is usually more of a business centre.

The Farmhouse is an essential part of any farm operation, serving as an office, a store, a boardroom, a make-shift veterinary clinic as well as a works canteen and restroom.  As a result HMRC acknowledge the uniqueness of the nature of a farmer’s expenditure in maintaining his home, and accepts a portion can be claimed as allowable business costs.

Normal practice is to include the full amount of the premises costs (such as council tax, water, light and heat, insurance and repairs) in a farmer’s accounts, with a portion added back in the tax computation.  This would, generally speaking, be between three quarters and two thirds. The amount can be agreed between the farmer and his accountant, and is dependent on lifestyle and farm activity, but it is unusual for HMRC to challenge a private use adjustment in this range.

The same principle applies to claiming input VAT on farmhouse expenditure, with an agreed portion being excluded from the relevant claim.  This can be a little more complicated as it can be difficult to justify restricting the same amount on, say, a repair to a bedroom as on repairs to the roof.

Where there is a partnership, with one or more partner occupying separate farmhouses, it can be difficult to argue that both act as business centres for the farm.  However, where the farm is a large concern or there are several enterprises operated by the partnership, a claim for expenditure on more than one farmhouse could be justified.  Again this is something the partners would need to discuss with their accountant.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Main Residence Nil Rate Band (RNRB)

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The introduction of the Main Residence Nil Rate Band (RNRB) may have a substantial impact on Inheritance Tax Planning and how farmers pass on their assets, possibly tax-free.

The new allowance is due to be introduce by April 2017 at an initial threshold of £100,000 which will rise to £175,000 by April 2020. This threshold is per individual and it will also be possible to transfer the allowance between married couples and civil partners.

The RNRB is in addition to the existing Nil Rate Band of £325,000 which is the current allowance available on the estate of each individual, the main difference being that the RNRB is tied in to residential property.

The RNRB allows complete relief from Inheritance Tax up to the threshold on a house lived in by the deceased at any time, provided that the house is given to a direct descendant such as a child, grandchild etc. or a spouse,  and that the net value of the estate at the date of death is £2m or lower.

With timely Inheritance Tax Planning, this new band could offer more flexible relief for those wishing to take a step back from active farming and where other avenues of tax relief, such as Agricultural Property Relief and Business Property Relief, have more restrictions or may not apply.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Image courtesy of Clare Bloomfield at FreeDigitalPhotos.net