Farmers Need to Keep Trading

29/10/2005, by Mark McLaughlin CTA (Fellow) ATT TEP, Tax Articles - General

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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 ‘Scheme’ moves farms subsidies away from production. It literally decouples the subsidy from production and moves it to ‘entitlement’. In broad terms, the subsidy (or ‘land management fee’ which is the politically correct term) is based on the area of land owned as opposed to the farm production.

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 news

The 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 required

Any 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; j.butler@butler-co.co.uk.

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.

About The Author

Mark McLaughlin is a Fellow of the Chartered Institute of Taxation, a Fellow of the Association of Taxation Technicians, and a member of the Society of Trust and Estate Practitioners. From January 1998 until December 2018, Mark was a consultant in his own tax practice, Mark McLaughlin Associates, which provided tax consultancy and support services to professional firms throughout the UK.

He is a member of the Chartered Institute of Taxation’s Capital Gains Tax & Investment Income and Succession Taxes Sub-Committees.

Mark is editor and a co-author of HMRC Investigations Handbook (Bloomsbury Professional).

Mark is Chief Contributor to McLaughlin’s Tax Case Review, a monthly journal published by Tax Insider.

Mark is the Editor of the Core Tax Annuals (Bloomsbury Professional), and is a co-author of the ‘Inheritance Tax’ Annuals (Bloomsbury Professional).

Mark is Editor and a co-author of ‘Tax Planning’ (Bloomsbury Professional).

He is a co-author of ‘Ray & McLaughlin’s Practical IHT Planning’ (Bloomsbury Professional)

Mark is a Consultant Editor with Bloomsbury Professional, and co-author of ‘Incorporating and Disincorporating a Business’.

Mark has also written numerous articles for professional publications, including ‘Taxation’, ‘Tax Adviser’, ‘Tolley’s Practical Tax Newsletter’ and ‘Tax Journal’.

Mark is a Director of Tax Insider, and Editor of Tax Insider, Property Tax Insider and Business Tax Insider, which are monthly publications aimed at providing tax tips and tax saving ideas for taxpayers and professional advisers. He is also Editor of Tax Insider Professional, a monthly publication for professional practitioners.

Mark is also a tax lecturer, and has featured in online tax lectures for Tolley Seminars Online.

Mark co-founded TaxationWeb (www.taxationweb.co.uk) in 2002.

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