Can You Save Tax with Five-Year Farmer’s Averaging?

Tax return - Farmers Averaging

You should by now have filed, or be the process of preparing, your tax returns for 2016/17. Have you remembered however, that as of 6 April 2016, farmers have the option to average their profits over five years? Two-year averaging is still available, and you can choose which is most beneficial for you – two-year, five-year or no averaging.

This is a valuable relief for those who have experienced fluctuating profits and can result in substantial tax savings.

Example

We can consider this using the example of Farmer Jones, who had the following profits in tax years 2012/13 to 2016/17.

Tax year 12/13 13/14 14/15 15/16 16/17
Profits £
Nil (loss) Nil (loss) Nil (loss) 5,000 70,000
2 year averaging 15/16 and 16/17
37,500 37,500
Tax & Class 4 NIC 7,949.60 8,029.60
5 year averaging
15,000 15,000 15,000 15,000 15,000
Tax & Class 4 NIC 2,044.50 1,764.05 1,633.96 1,504.60 1,424.60

The overall tax and class 4 NIC due without averaging is £20,884.60. With two-year averaging it would be £15,979.20 and with five-year averaging, £8,371.71. That is a significant tax saving of £7,607.49 for opting for five-year averaging over two-year, and illustrates the importance of this new relief.

This simple example assumes that Farmer Jones has no other income. You must also ensure that you meet the qualifying criteria before claiming Farmer’s Averaging.

If you’d like any further information 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.

Taxpayer Victory: Tribunal Grants Inheritance Tax Relief to Livery

Business Property Relief

Business Property Relief (BPR) can exempt assets from Inheritance Tax (IHT) on the basis that they were used in a genuine business, assuming all other qualifying criteria is met. It is not available where the business activity is wholly or predominantly holding investments.

In The Estate of Maureen W Vigne (deceased) v HMRC [2017], HMRC denied the BPR claim entered by the deceased’s representatives on the basis that her livery involved only the letting of land for the use of others, and the extent of the other services offered did not constitute a business.

The first tier tribunal, however, countered that the extra services demonstrated that the business was a genuine livery business and it clearly went beyond simply holding investments. They allowed the BPR claim.

The representatives had also claimed agricultural property relief (APR) on the basis that the asset constituted ‘agricultural property’.  However, the tribunal held HMRC’s view that it did not. Equine activities are not usually characterised as agricultural.

Green & Co undertake inheritance tax reviews which consider an Estate’s exposure to IHT and planning opportunities. If you’d like any further information please contact us 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 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.

 

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.

Choosing the best structure for your farming business

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How do you know whether to choose a sole trade, partnership or limited company structure for your business? The changes in farming over recent years have made this question much more complicated. Many factors need to be taken in to consideration when making this decision.

Traditionally farms have been small family owned businesses which would usually best suit a partnership structure. Farm businesses have now developed and diversified into more complex businesses which may be more suited to incorporation. Some of the benefits of incorporation include:

  • Increased tax efficiency – by being able to receive income from both salary, dividend, rent and interest
  • Reduced risk – the business and all its liabilities can be separated from the owners assets which can reduce risk if anything goes wrong
  • Improved image – incorporation can help to convey a more professional image of the business
  • Increased flexibility – being able to sell equity allows limited companies to be flexible when raising investment and funding.

All these benefits can make incorporation appear a very attractive option; however it also has some disadvantages, such as: the cost of incorporation, the extra paperwork and administration and also having to meet greater compliance requirements.

As every farm business differs from the next it would be impossible to say what the best option would be for all farms. In this case one size does not fit all.

If you have any queries about business structures and your farming activities, 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, 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

pigs on the farm

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

Your Redundant Farm Building could be Restricting your Inheritance Tax Relief.jpg

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

Tax Allowances on the Farm.jpg

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.