Agriculture Focus - Autumn 2022

Structures and buildings allowance –maximise your claims

Structures and buildings allowance (SBA) is available as a tax deduction on qualifying expenditure incurred by farming businesses after 28 October 2018. It is available on new, nonresidential structures and buildings, where the contract for construction is entered into, and the construction activity began, after that date.

The relief applies to both UK and overseas structures and buildings, including new conversions or renovations, where the farming business is within the charge to UK tax. A business which acquires an unused asset that has already been constructed and not incurring the cost of construction themselves, can qualify for the allowance.

The allowance is currently given at an annual rate of 3% on a straight-line basis. No balancing charge, or allowance will apply on a disposal of the asset. Instead, a purchaser will continue to claim the annual allowance of 3% of the original cost, not the amount of expenditure incurred by them on the purchase. But allowances claimed must be taken into account in the capital gains calculation.

WHAT QUALIFIES?

In summary, apart from certain professional expenses such as planning permission, any expenditure on land or buildings by a farming business that does not qualify for capital allowances (CA), and is distinct from the land surrounding it, will be eligible for SBA.

However, despite the name, the allowance is available on certain items that are neither a structure nor a building! For example, relevant expenditure for a farming business could be a farm building or office, commercial buildings to let out, a reservoir, new road or new fencing. In fact, anything that effectively alters the nature of the land. If expenditure is on a used item, SBA will only be available when the vendor provides the purchaser with an SBA statement confirming the allowances already been claimed, and allowances still available. Even if the item is pre-October 2018, SBA can be claimed by the purchaser on additional expenditure on the asset.

SBA cannot be claimed on any expenditure in a ‘residential setting’, therefore, it is not available in respect of a furnished holiday let property.

REVIEW THE EXPENDITURE

CA annual investment allowance or super deduction for companies is not available on SBA qualifying expenditure. However, these allowances would potentially be available where expenditure within the structure, such as electrical or water systems, qualified as plant and machinery. Therefore, it is essential to review relevant expenditure to identify the items that can qualify as plant and machinery, as this will enable tax relief to be obtained at a much earlier date.

Construction industry scheme –potential deemed contractors

The construction industry scheme (CIS) applies to contractors and subcontractors carrying out work in the construction industry.

There is a requirement to register if a subcontractor entity is receiving payments and wants to receive payments gross, i.e., without a tax deduction or with a 20% tax deduction, rather than the default 30% deduction.

A farming business carrying out contracting work, such as repair or installation of roadways and tracks for third parties, may fall under the CIS.

In addition, farming businesses who are investing heavily in projects such as property improvements, new farm buildings, installation of anaerobic digesters or solar panels, and using contractors to do the work, may be classed as a deemed contractor. This would be the case if they were making payments in respect of relevant work of more than £3 million on a rolling 12-month basis. As a deemed contractor, the business is required to register under the scheme, deduct tax from payments and make returns.

If your business is involved in either construction contracting for others, or planning on a significant investment programme, you should establish how the CIS rules affect you, and what you need to do to register.

Annual investment allowance for capital allowances

Following the mini-Budget, the annual investment allowance (AIA) that allows farming businesses a 100% tax deduction on qualifying plant and machinery in the year of expenditure, has been permanently set at a limit of £1 million.

Therefore, businesses will not need to invest in plant and machinery before 31 March 2023 to take advantage of the £1 million limit.

We are not currently aware that there is going to be any change to the super deduction relief, which was introduced originally to prevent a delay in expenditure in advance of the increase in the rate of corporation tax to 25% from 1 April 2023.

If a limited company is planning expenditure on new plant, then they also have until 31 March 2023 to claim the additional ‘super deduction’ and obtain a tax deduction of 130% of expenditure. There is no

upper limit to the super deduction, but if expenditure is on ‘used’ plant, it will not qualify and the company will have to claim tax relief under the AIA provisions.

GOING FORWARD

If a company is looking to invest in new plant and machinery in the near future, they need to be aware of the end of the super deduction relief changes and plan when the expenditure should take place to maximise tax relief at the earliest possible time.

Meet our team

A Q&A with Director in the Farms and Estates team, Shirley Roberts.

WHAT IS IT LIKE BEING AN ADVISER IN THE AGRICULTURAL SECTOR RIGHT NOW?

The last few months have been all about the trust registration service; many of my clients have needed to register trusts, some where they didn’t even realise a trust existed. The deadline for submission of trust registrations was 1 September but given how this has been introduced by HMRC, I think there will be more to register in the coming months. Luckily clients aren’t too late to do this as HMRC are taking a ‘soft landing’ approach to the deadline, so long as trustees do complete the registrations as soon as they can.

I also continue to be busy discussing succession and inheritance tax planning (IHT) with clients. Asset values in the agricultural sector remain strong, so the importance of securing the desired tax reliefs continue to be hugely important for my clients.

Securing business property relief is likely to be more of a challenge for many estate businesses in the coming years when basic payments will be phased out. We need to understand how new grants and environmental packages will impact the matrix of the business, we’re working closely with clients on a case-by-case basis, to work out what the best course of action for them will be.

WHAT DO YOU ENJOY MOST ABOUT YOUR ROLE?

My clients! I’ve got some really lovely clients who have a lot going on. What I really love is the regular contact with my clients. It’s very rare that I’m only in contact with my clients once a year to complete their annual tax return – there’s always something going on where I can advise and support.

The diversity of their businesses, what they’re doing, and how they involve me in is really interesting. I think many people perceive tax to be a bit dull, but we’re always

working with people to make sure that tax is on their minds, particularly when they’re planning an exciting project, or any change in their business – there is always a tax angle to consider, and getting it right, or making the most efficient decision can make a dramatic difference.

WHY DO YOU WORK IN THE AGRICULTURAL SECTOR?

My parents are dairy farmers and I still have lots to do with the family farm which my twin sister and parents run. It is a wonderful family business, but it would have been very difficult for my sister and I to have both stayed involved and support our families from the same farm –but farming remains very close to my heart.

It just happened that I was doing some grain sampling as part of a summer job whilst I was at university; the person I was working for recommended me to his accountant at Baker Tilly, where I completed my training contract. I really liked the tax angle and it made sense to me that this was a hugely important part of the accountants’ role. No farmers like paying tax, so if they can be well advised they can make decisions that will help mitigate the tax liability. I didn’t set out be a tax adviser, but I wouldn’t change it now.

TELL US SOMETHING THAT WE MIGHT NOT KNOW ABOUT YOU?

I have two wonderful children who I spend my weekends encouraging to enjoy their activities, which includes playing lots of sport and in particular, football. I can regularly be found on the edge of the children’s pitches at weekends supporting them, and my husband who coaches my daughter’s team.

If you would like more information on trusts, IHT or other tax advice, please get in touch with Shirley at shirley.roberts@hazlewoods.co.uk or 01242 680000.

HERD BASIS ELECTIONS

Over the last 12 months livestock prices have been steadily improving, which is positive news for existing livestock farmers, and others considering entering livestock production. A farming business which has recently acquired a production herd, or where there has been a change to the trading structure, can adopt the herd basis by making an election for accounting and tax purposes.

As a rule, all farm animals are allocated as trading stock and valued at the lower of cost or net realisable value on an annual basis. However, where a valid election is made to HMRC, a production herd can be shown as a capital item, and included as a fixed asset at original cost.

WHAT QUALIFIES AS A PRODUCTION HERD?

HMRC classes a production herd, as animals kept for the products which they produce; either the sale of their offspring (e.g. lambs or piglets) or the sale of their produce (e.g. milk, wool, eggs or honey).

Some examples of eligible herds include:

> Dairy and suckler beef herds

> Breeding flock

> Flock/herd kept for fleece production

> Laying hens

> Horses kept for breeding

> Bees kept for honey

Exclusions from the herd basis include working animals, animals kept for racing, flying herds, immature animals or animals kept for slaughter.

WHAT ARE THE EFFECTS OF AN ELECTION?

> No tax relief is available on the initial cost of the herd, or any additions, as this is capitalised on the balance sheet.

> There is no need to revalue the animals included in the herd on an annual basis. The value of the herd remains the same, even where some animals die or are sold, and others join. Where the number of animals in the herd fluctuates within 20%, the value of the herd is adjusted through the profit and loss and is subject to tax.

> The value attributed to any animal increasing the number in the herd is complicated and will depend on whether the replacement animal has been purchased or has been home bred.

> When a business disposes of a substantial part of (more than 20%), or the whole herd, the difference between the cost of the herd held as a tangible fixed asset, and the proceeds for which the animals are sold is tax free.

In recent years, we have seen several farming businesses moving away from production herds, for a variety of reasons. The volatility in milk prices, coupled with staff recruitment difficulties has led to many long-established milking herds being sold. Generational succession, and other changes, such as the move from single farm payments to environmental based incentive schemes also lead to a re-evaluation of the existing trade, and often a move to a more diversified business.

WHEN AND HOW CAN AN ELECTION BE MADE?

An election must be made in writing to HMRC. For a limited company, the election must be made within two years of the end of the accounting period in which the herd is first kept. For a sole trader or partnership, the election must be made by the 31 January, falling two years after, the end of the tax year in which the herd is first kept.

The time limit is extended by a further 12 months if the first year the herd is kept is the first year the farming activities began.

Consideration should be given to making a herd basis election where:

> There is a change in structure of the business, i.e., the introduction, retirement, or death of a partner.

> There is a change in the type of herd, i.e., the sale of a dairy herd and introduction of a beef herd.

> An additional type of production herd is started.

Where there is a change in the structure of the business, there may, or may not have been a herd basis election in place before the change. If an election was in place, but this is not renewed, the accounting and tax position is to treat the herd as being sold at market value and reintroduced as trading stock.

If no election was previously in place, the new business should consider if it is appropriate to now make an election.

SUMMARY

If a business is looking to acquire a herd, change the type of production animals it keeps, or change its business structure, consideration should be given to making a herd basis election, and when to make it.

LOSS RELIEF AGAINST TOTAL INCOME FOR UNINCORPORATED FARMING BUSINESSES

The availability of the annual investment allowance (AIA) for capital allowances at the current level of £1 million could mean that unincorporated farming businesses, such as a sole trader or partnerships, may have the opportunity to create a tax loss. The AIA gives a 100% tax deduction in the year of expenditure for qualifying expenditure on plant and machinery, and/or on integral fixtures, such as electrical and plumbing works.

This loss can generally be utilised by either: > carrying forward against future trading profits; or > by setting the loss against total income in the current and earlier tax year.

In the tax year of loss, this would be against rental or other income. But the previous tax year could also include earlier profits from the same trade.

For losses that are generated in the 2021 and 2022 tax years, this ‘sideways’ loss relief allows a potential carry back for a further two years against profits from the same trade only. This additional carry back is subject to a £2 million cap.

The ‘normal’ current year and previous year relief is restricted to a cap of £50,000 against other income, or 25% of total income if this is greater, but without restriction against profits from the same trade. The ‘normal’ relief also enables the losses to be set against capital gains of the same tax years without restriction

Where an actual loss before capital allowances is made by an unincorporated farming business, relief for the loss against total income is not generally available after five consecutive years of losses. However, in a small number of cases, ‘sideways’ loss relief can continue to be used if it can be shown that there was a reasonable expectation of profit. HMRC will look very closely at a loss claim after five years, therefore, to make a successful additional claim, it would be essential to have a clear business plan in place, and a clear justification for why the loss continued beyond the expected period.

There is no one answer to how a loss should be claimed, understanding the options, and the likely future profit position is essential to making the best claim.

LOOKING FOR PASTURES NEW?

Do you know someone who would like to join our specialist Farms and Estates team providing accountancy, business and tax advice? We are looking for established professionals and trainees to join our growing team. If you know someone who has a passion for farming, horses or the wider rural sector and are wanting to kickstart their career, or perhaps they are already a specialist in their field and fancy a new challenge, then ask them to get in touch with our Farms and Estates team below.

MEET THE TEAM

NICK DEE nick.dee@hazlewoods.co.uk

NICHOLAS SMAIL nicholas.smail@hazlewoods.co.uk

LUCIE HAMMOND lucie.hammond@hazlewoods.co.uk

PETER GRIFFITHS peter.griffiths@hazlewoods.co.uk

SUE BIRCH sue.birch@hazlewoods.co.uk

SHIRLEY ROBERTS shirley.roberts@hazlewoods.co.uk

PIP CUSACK pip.cusack@hazlewoods.co.uk

HANNAH REASON hannah.reason@hazlewoods.co.uk