Agricultural Focus - Summer 2021

Agricultural Focus DRIVING LIFELONG PROSPERITY

Summer 2021

SPOTLIGHT ON RATES AND ALLOWANCES

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INSIDE Will your business be able to take advantage of the loss carry back extension?

Farming companies – increased capital allowances > Contracting Farming Agreements > Planning for increased corporation tax rates > VAT update: Storage and furnished holiday letting > >

Will your business be able to take advantage of the loss carry back extension?

Included within the spring 2021 budget was the introduction of a temporary additional loss relief for trading businesses. This relief will be particularly useful for businesses that have been hard hit by the pandemic but have previously traded profitably.

EXTENSION TO LOSS RELIEF Prior to the 2021 budget, on-going businesses could only carry back trading losses against the previous 12 months’ profits.

Although there are restrictions for some larger companies, most trading companies could carry back a loss without restriction. However, individuals trading as sole traders and partnerships have a maximum carry back claim of the higher of £50,000 and 25% of their income.

As a result of the budget, a loss made during the period 1 April 2020 to 31 March 2022 can now be carried back up to three years against profits of the same trade, with a £2 million cap for the relevant 12-month accounting period. The losses are to be set against profits of most recent years first, before being carried back to earlier years.

The changes will affect businesses, including furnished holiday letting, that have made a significant taxable

loss in a period ending between 1 April 2020 and 31 March 2022.

To qualify, businesses do have to be trading commercially and have previous profits against which a loss can be set; therefore, farming businesses which have been loss making for the previous 5 years, will not be eligible.

There is a short window of opportunity to carry back trading losses for the extended period, and with some planning the cash flow benefit of the tax refund could help the business.

Trading losses can still be carried forwards where this is most tax efficient. Where limited companies are anticipating profits above £250,000 in the future, carrying forward the loss could increase the tax relief to 25% or even 26.5%. The business will need to weigh up the benefit of the cashflow advantage received when carrying back the loss, against the higher relief in the future.

EXAMPLES Company Due to capital expenditure on expansion and the pandemic reducing the milk price, a dairy farmer trading as a company, supplying the catering industry, has made a significant trading loss to 31 March 2021 of £1.25 million.

In previous accounting years, the company made profits as follows; >

31 March 2020 – £400,000, corporation tax paid at 19% - £76,000

>

31 March 2019 – £500,000, corporation tax paid at 19% - £95,000

>

31 March 2018 – £500,000, corporation tax paid at 19% - £95,000

Previously, the company could have only carried back its loss for 12 months to recoup the corporation tax paid in the year ended 31 March 2020 of £76,000.

As a result of the loss carry back extension, the company can now carry back its loss of £1.25 million to all three years, leaving taxable profits of £150,000 in the year ended 31 March 2018.

The company would receive a corporation tax repayment of £237,500.

Partnership A poultry farmer trading as a partnership has expanded in the year to 31 March 2022, with a capital allowances claim of £3 million generating a taxable loss in the year of £2.5 million.

In previous accounting years, the partnership made profits as follows; > 31 March 2020 - £600,000 > 31 March 2019 - £500,000 > 31 March 2018 - £750,000

Previously, the partnership could have only offset the loss sideways or carried back losses to the higher of £50,000 or 25% of each partners’ income.

As a result of the loss carry back extension, if beneficial, the partners can now claim losses totalling £1.85 million covering all three tax years, potentially recouping the income tax paid on the profits.

Going forwards, when the partnership makes taxable trading profits again, 5-year farmers averaging can be utilised to ensure the basic rate tax bands are fully utilised across the period.

IN CONCLUSION If your business has previously traded profitably and has incurred or is expecting a significant trading loss, either directly due to the pandemic, or perhaps due to significant capital expenditure qualifying for annual investment allowance, there could be a significant cash flow advantage in claiming the increased loss relief.

If you are planning or considering large investment in items qualifying for capital allowances, such as new poultry sheds, it is worth considering the timing of expenditure as it could be more attractive to make this investment before 31 March 2022, giving you the additional flexibility to carry back any trading losses for three years as opposed to just 12 months.

This is particularly relevant if you are trading as a company, being able to take advantage of the 130% super tax deduction on capital allowances available in this period.

If you would like to discuss planning opportunities around loss relief carry back, please contact Hannah Reason at hannah.reason@hazlewoods.co.uk or 01242 680000.

HANNAH REASON 01242 680000 hannah.reason@hazlewoods.co.uk

Farming companies – increased capital allowances The 2021 Budget introduced a 130% capital allowances deduction available to all companies, including farming companies, on ‘main rate’ capital allowances expenditure on new plant and machinery, from 1 April 2021 to 31 March 2023. Qualifying expenditure will be movable plant and machinery, such as a tractor or combine. The expenditure only relates to new, not second-hand expenditure.

This may seem a great incentive and is designed to boost the economy, however it brings with it a dilemma on when to spend. As covered in our article ‘Planning for increased corporation tax rates’, the Budget also introduced a future increase to the corporation tax rate from 19% to 25%, with effect from 1 April 2023.

Depending on your projected profit levels, there may be an optimum time to purchase new equipment.

The 130% capital allowances deduction means that the effective rate of tax relief at the current rate of 19% is 24.7% (19% x 130%), meaning that there is little incentive for companies where profits are to be expected to be greater than £250,000, to bring forward expenditure to pre- 31 March 2023. A delay in expenditure until after this date will give tax relief at 25%.

Where profits are expected to be less than £50,000 the 19% rate will still apply; therefore, expenditure before 31 March 2023 will give a higher rate of relief.

The more interesting position is where profits are between £50,000 to £250,000. In this band, the effective corporation tax rate is 26.5%; therefore, delaying expenditure until after 1 April 2023 will result in a 26.5% tax saving, rather than 24.7% pre- 31 March 2023.

The 2021 Budget also introduced additional tax relief for companies, being expenditure eligible for capital allowances which will not qualify for the 130% ‘main rate’ deduction. For farming companies, relevant expenditure would be expenditure on integral features in newly built buildings, such as heating and ventilation systems.

Depending on other expenditure being incurred, and whether the annual investment allowance of £1 million has already been utilised, it may be worth bringing forward expenditure on new buildings to qualify for this relief.

The tax relief is generally not the main driver in purchasing new equipment, nor should it be. It is important to plan the timing of equipment purchase to benefit the business, though always worth exploring the actual date when a purchase is close to a change in rate of tax or allowance.

It has already been publicised that these new provisions may be subject to change and amendment; therefore, advice should be taken before expenditure is incurred.

PETER GRIFFITHS 01242 680000 peter.griffiths@hazlewoods.co.uk

CONTRACTING FARMING AGREEMENTS TIME FOR A CHANGE? As the Government is now focusing more on sustainable farming incentives and environmental driven subsidies, the way in which the British land is being farmed is likely to change.

With the phasing out of the current basic payment scheme (BPS) and the introduction of the environmental land management scheme (ELMS), some farmers may look to diversify their activities or change their current practices to increase profitability.

There are various means of making changes, one of the most popular we are seeing is a move towards contract farming agreements (CFA).

WHAT IS A CONTRACT FARMING AGREEMENT? A CFA is a joint venture between a landowner/occupier and a contractor. Both parties will provide different levels of capital input, whilst sharing the cost of variable inputs and any surplus that many arise. Generally, these agreements are used on arable land, but can be seen for dairy and some other livestock enterprises.

CAN BOTH LANDOWNER/OCCUPIERS AND CONTRACTORS BENEFIT? For landowner/occupiers a CFA can allow them to reduce capital tied up in expensive machinery, and reduce the physical man hours worked. The landowner/occupier will still be seen as the ‘farmer’, so can claim BPS (whilst available) on the land in the agreement and still have control over land outside of the agreement, enabling them to enter into other sustainable farming incentives through ELMS. A further benefit for landowner/occupiers is the inheritance tax position of the business should not be altered, as they will still be seen as the active farmer.

The benefit of the CFA to the contractor is it allows expansion of their business without the large capital outlay of buying land, or committing to a tenancy arrangement. This additional acreage should give the contractor better economies of scale, plus the benefit of a fixed £/acre return. Furthermore, the divisible surplus gives the contractor an incentive to maximise profits.

HOW DOES IT WORK? The landowner/occupier will provide the land and buildings, with the contractor providing the labour, machinery and other services such as agronomy. A bank account will usually be set up in the landowner/occupier’s name with all income and expenses being paid through the account. Generally, the contractor will order inputs and manage the sale of produce, whilst being in contact with the landowner.

The agreements on arable land will commonly be over a three-year period, with the landowner paying the contractor quarterly. Once all harvest sales and costs have been accounted for, there will be a calculation to work out the annual surplus which will be shared in an agreed ratio.

Each agreement will be bespoke, to reflect the land productivity and risk each party is willing to take.

Agreements on arable land could see both contractor and landowner receiving a payment between £80-120/acre and a two-tier surplus share. The first of these might be 80:20 in favour of the contractor, up to a certain margin per acre, followed by a 50:50 or 60:40 share in favour of the farmer.

For tax purposes, it is important for the landowner/ occupier to be actively involved in the decision making over the land covered by the agreement. Both parties should meet at least annually, to review the previous year, plan, and budget for the next 12 months.

SUMMARY With the imminent loss of BPS income, and the focus towards environmentally led incentives, landowners/ occupiers may need to reduce arable acreages to qualify for the new Government initiatives.

A reduction in cropping area could result in the capital cost of machinery, labour and other variable costs becoming expensive, making the enterprise uneconomic. To remain profitable, the farming structure may need to change.

A CFA may well be the best way forward for you. It can allow you to make an annual income from the land, reduce your capital cost and working hours, whilst still remaining the active farmer and securing the benefits of capital tax reliefs.

If you would like to discuss this further, please contact Daniel Webb.

DANIEL WEBB 01242 680000 daniel.webb@hazlewoods.co.uk

Planning for increased corporation tax rates The budget gave us early warning of an increase in the rate of corporation tax from 19% to 25% with effect from 1 April 2023. The 19% rate will continue to apply to companies with annual profit of not more than £50,000 with marginal relief for profits up to £250,000. This is illustrated as below: Profits

Current corporation tax at 19%

Corporation tax under new rules

Additional corporation tax due

£50,000

£9,500

£9,500

£0

£100,000

£19,500

£22,750

£3,750

£150,000

£28,500

£36,000

£7,500

£200,000

£38,000

£49,250

£11,250

£250,000

£47,500

£62,500

£15,000

£300,000

£57,000

£75,000

£18,000

It is important to note that, the small profits rate will not apply to ‘close investment holding companies’ which, by definition, will include many family investment companies.

Opportunities to reduce the tax burden include: > Bring forward sale of assets pregnant with gains, such as farmland, before the increase takes place. >

If it is intended company assets, such as cottages, will be extracted from a company and passed to a family member, consider doing this before the increased rate is applied.

>

Where possible, plan the timing of sales of livestock or arable stocks to fix which period the profit will be recognised.

>

Consider corporate pension contributions to keep within the £50,000 lower rate.

>

Investment in plant and machinery will impact your taxable profit and could enable a profit below £50,000 to be achieved.

Defer known repair expenditure to obtain tax relief at a higher rate.

>

Consider the interaction with the super deduction of capital allowances on whether to bring forward capital expenditure.

>

Review your trading structure, is a company still the best entity? Will the increase in corporation tax mean you may be better off trading as a sole trader, partnership or limited liability partnership (LLP).

>

To optimise your corporation tax position, the key is to plan in advance, particularly around the time of transition.

PIP CUSACK 01242 680000 pip.cusack@hazlewoods.co.uk

VAT UPDATE: STORAGE AND FURNISHED HOLIDAY LETTING Since 1 October 2012 a compulsory VAT charge has been applied to the supply of facilities for the self-storage of goods. This is further defined by HMRC as meaning ‘the use of a relevant structure for the storage of goods by the person(s) to whom the grant of facilities is made.’

Since 1 October 2012 a compulsory VAT charge has been applied to the supply of facilities for the self-storage of goods. This is further defined by HMRC as meaning ‘the use of a relevant structure for the storage of goods by the person(s) to whom the grant of facilities is made.’

a change of rate, the supplier can choose to apply the rate applying at the basic tax point (so when the let actually takes place, in the case of a holiday let) or at the actual tax point (determined by when the customer actually makes payment) if those two dates fall either side of a change in VAT rate.

This essentially means that where the principal use of a building, unit or enclosed container/structure, is for ‘storage’, or could potentially be used, by a tenant or customer for such purposes, VAT must be applied to the rental charge for the facility even if it is not already opted to tax. However, the provisions do not apply to storage in the ‘open air’ (for example, touring caravans stored in a field) although HMRC may well argue that such a supply is VATable under the rules for ‘parking’.

As an example, the property owner would only have to charge 5% VAT if a customer made a payment by 30 September 2021, or 12.5% if payment was made in the following six months, even if those payments related to a booking for summer 2022.

Applying these rules to the agricultural sector means the letting out of a farm building to a third party, for that third party to store their own goods, is a supply subject to VAT at 20%, unless the tenant is a charity using the building for non-business purposes, or the storage is ancillary to another activity carried on by the tenant in that building.

It does not matter whether the occupier of the space is an individual storing surplus possessions, or a business storing goods for its trading activities, as long as the principal use of the facility is for ‘storage’, then VAT must be applied to the rental charges.

This goes beyond the generally understood notion of ‘selfstorage’ and the legislation brings with it many practical difficulties, such as how the landlord is meant to ascertain what the occupier’s use of the facilities actually is. Therefore, anyone seeking to rent out surplus space in an unused farm building, will need to ask their tenants what they are doing with that space and then apply VAT as necessary.

It is worth noting that live animals are specifically excluded from the term ‘goods’, and so facilities for their storage are unaffected by these rules.

FURNISHED HOLIDAY LETS, MAKING THE MOST OF THE REDUCED VAT RATE The 5% temporary reduced rate of VAT on supplies of accommodation introduced as a COVID-19 support measure is due to run until 30 September 2021; this is followed by a 12.5% rate until 31 March 2022, after which the standard 20% rate will apply There are quite a few changes of rate here, giving the VAT registered property owner, a degree of flexibility in the rate to apply. The reasoning behind this is that, where there is

Based on a gross letting fee of £1,000 per week, by offering an early booking discount before 30 September 2021 at a rate of 12.5%, or 6.25% between October 2021 and March 2022, it is possible for you to secure the same level of income but gain a cashflow advantage. If you chose a lower discount rate, your net income would be more! See the table below for the numbers: VAT rate

20% £

Gross letting fee

12.50% £

5% £

1,000.00

1,000.00

1,000.00

Output VAT

166.67

111.11

47.62

Net income

833.33

888.89

952.38

1,000.00

1,000.00

1,000.00

Gross letting fee Early booking discount

– 6.25%

62.50 12.5%

125.00

Gross income for VAT 1,000.00

937.50

875.00

Output VAT

166.67

104.17

41.67

Net income

833.33

833.33

833.33

1,000.00

1,000.00

1,000.00

Gross letting fee Early booking discount

– 5.00%

50.00 10.0%

100.00

Gross income for VAT 1,000.00

950.00

900.00

Output VAT

166.67

105.56

42.86

Net income

833.33

844.44

857.14

RUSSELL FLAGG 01242 680000 russell.flagg@hazlewoods.co.uk

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

DANIEL WEBB daniel.webb@hazlewoods.co.uk

CHERRELLE FORD cherrelle.ford@hazlewoods.co.uk

PIP CUSACK pip.cusack@hazlewoods.co.uk

CLAIRE BRIESE claire.briese@hazlewoods.co.uk

LYN MOREY lyn.morey@hazlewoods.co.uk

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HANNAH REASON hannah.reason@hazlewoods.co.uk

HEIDI BRADLEY heidi.bradley@hazlewoods.co.uk

Hazlewoods LLP and Hazlewoods Financial Planning LLP produce regular updates, using our expert commentary to provide you with information about our services, events and topical premium business news.

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Staverton Court, Staverton, Cheltenham, GL51 0UX Tel. 01242 680000 www.hazlewoods.co.uk / @HazlewoodsAgri This newsletter has been prepared as a guide to topics of current financial business interests. We strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of the material can be accepted by us. Hazlewoods LLP is a Limited Liability Partnership registered in England and Wales with number OC311817. Registered office: Staverton Court, Staverton, Cheltenham, Glos, GL51 0UX. A list of LLP partners is available for inspection at each office. Hazlewoods LLP is registered to carry on audit work in the UK and regulated for a range of investment business activities by the Institute of Chartered Accountants in England & Wales.