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TaxationWeb by Julie Butler, FCA Julie Butler FCA comments on the Single Farm Payment and the resulting need for a ‘tax marriage’ between land and farm trading vehicles. A recent special edition tax bulletin on the Single Farm Payment Scheme (SFP) for farmers has put great emphasis on the need for a farmer to stay trading. The ‘Scheme’ is the result of the mid-term review of the Common Agricultural Policy (CAP) and it is probably the most fundamental change to farming since the repeal of the Corn Laws.The original hopes of the farming community and their associated bodies was that as farmers were being encouraged to give up production/farming, they would still maintain their Inheritance Tax advantages as a business. The theme of the bulletin is that if the recipient is a non-farmer they will still be taxed under what was schedule D, Case I (and is now section 10 ITTOIA 2005) provided that there is a trade. However, those who are not seeking to trade, i.e. a non-trader will have the subsidy taxed under schedule D, Case VI (or as it is now known as Chapter 8 of Part 5 of ITTOIA 2005). Herein lies the problem. If the subsidy is received not just by a ‘non-farmer‘ but by a ‘non-trader’, then in principle the IHT on the land and the entitlement will not be eligible for IHT reliefs, e g. Agricultural Property Relief (APR) or Business Property Relief (BPR). Essentially the IHT treatment will depend on the Schedule D (trading) status. Good newsThe good news is that if the farmer continues to farm, then the entitlement to SFP will receive automatic IHT relief and the farmer will not have to wait as it is deemed to be needed for the future use of the business and therefore escapes the two-year ownership rule for IHT.The non-trading theme continues throughout the bulletin, mentioning that obviously if the farmer is not trading then they do not need to be VAT Registered and therefore will not be able to make input VAT claims. Owning land and farmland that needs to be kept in good agricultural and environmental condition does take a lot of looking after, rather like a very, very large garden and the costs associated therewith would of course have input VAT. In addition, any expenses associated with the receipt of the income would have to be proved to be wholly and necessarily for purposes of the trade in order to achieve Income Tax reliefs and if there is not a trade, it could prove to be quite an onerous task for the tax advisor to justify the claim. The key problems here could be ‘lifestyle expenses’ such as motor expenses, farmhouse costs etc. Care requiredAny tax advisors acting for landowners, farmers and landed estates must be very careful to check the position concerning this establishment of a trading activity, whether it is farming or some other form of alternative land use which would still qualify as a trade. The tax treatment would be seen to be driving farmers, who can no longer economically farm themselves, to move towards contract farming arrangements or share farming arrangements with local farmers or large contract farming organisations. A carefully worded contract that protects the Schedule D position can ensure trading status and the preservation of some very important tax reliefs for VAT, Income Tax, Business Asset Reliefs for Capital Gains Tax and for APR/BPR for IHT.For contract or share farming arrangement to pass Schedule D Case I (old terminology) status tests, there must be all the basic ‘badges of trade’ both within the wording of the contract and in the factual operation thereof. Some farmers are supporting the contract/share farming arrangement with some small element of ‘in-hand‘ farming, e.g. some livestock rearing so as to give greater protection of the trading status. Interesting times lie ahead…… August 2005 Julie Butler, FCA Article supplied by Julie Butler FCA, Butler & Co, Bowland House, West Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email; This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Julie Butler FCA is the author of Tax Planning for Farm and Land Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd edition) and Equine Tax Planning ISBN: 0406966540.
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About The Author  Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence. Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website. |
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Article Added Saturday, 29 October 2005 | 2352 Hits |
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