Agricultural Focus DRIVING LIFELONG PROSPERITY
Winter 2020
SPOTLIGHT ON TAX
SIGN UP TO RECEIVE OUR BUSINESS UPDATES INSIDE Capital gains tax on sale of residential property Farmer wins recent inheritance tax decision > Is your accounting package working for you? > Capital allowances on second hand agricultural buildings > Who is working for you? > >
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. SIGN UP/UPDATE ONLINE: http://bit.ly/hazlewoods
Capital gains tax on sale of residential property A further change to the way that residential properties are treated for tax purposes will come into force for all sales by individuals made after 5 April 2020. Currently the capital gains tax (CGT) falls due on 31 January following the tax year to 5 April in which the disposal takes place. The date CGT is due on a disposal made after 5 April 2020 will be 30 days after the completion date of the transaction, a return detailing the capital gain must also be made at this time. However, no returns are required for a disposal where no tax is due. This change does not apply to sales of properties that have always been used as a furnished holiday let where the filing and tax payment deadline will remain 31 January following the tax year of disposal. Where the property sold has been the principal private residence (PPR) of the vendor at some point in the past, the last 18 months of ownership are currently eligible for PPR relief irrespective of the use of the property during this time. For disposal made after 5 April 2020, this period will reduce to 9 months leading to a potential increase in the CGT liability. In addition, where a property has been the PPR of the vendor in the past, and has also been let out for a period, a relief known as letting relief is available. This relief can reduce the taxable gain by up to £40,000 per individual
depending on circumstances. This relief will only be available after 5 April 2020 if the vendors lived in the property at the time it was being let out. GOING FORWARD The above changes may encourage some individuals who are planning to sell a residential property to try and make sure exchange and completion of contracts happen before 5 April 2020 as this will definitely increase the time they have to pay any CGT liability and may also mean a reduced CGT liability. For sales occurring after 5 April 2020 it will be necessary to be able to calculate the capital gain shortly after disposal. Often the acquisition costs are not readily available and will need to be researched, or it might be necessary to obtain a valuation to establish the cost, such as with an asset acquired before 31 March 1982. Taking advice regarding CGT before selling and having the acquisition information in place will help streamline the process. Please contact Peter Griffiths if you have any capital gains tax questions.
Farmer wins recent inheritance tax decision The first tier tribunal (FTT) has recently allowed a claim to agricultural property relief (APR) on a farmhouse and business property relief (BPR) on the surrounding land and outbuildings where the majority of the relatively small holding of land was let on grazing licences. In the case of, Charnley and another v HMRC [2019], Mr Gill an elderly farmer owned a farm comprising of a modest farmhouse, barn, outbuildings and bare land totalling 22.72 acres. In the latter years of his life, he allowed other farmers to graze their livestock on much of his land under annual grazing licences. Mr Gill died on 20 November 2013 and his estate claimed APR and BPR. HMRC deemed that the farmhouse and outbuildings were not ’occupied for the purposes of agriculture’ in the two years before Mr Gill’s death and refused the claim for APR over the house, brick barn and other outbuildings. APR was allowed over the land but based on the condition of ‘ownership’ rather than ‘occupation’. Mr Gill’s estate argued and provided supporting records and photographs to show that although Mr Gill did not own the livestock that grazed his land, he was responsible for the daily care (checking livestock at least daily, helping to move them between pastures, attending to sick animals and vaccinations) as well as for maintenance of the land (fixing fences and hedges, clearing ditches, harrowing, rolling and topping) using his own equipment. Mr Gill also continued to grow and harvest vegetables on an acre of the land which he bartered at the local shop. The evidence was enhanced by one of the graziers describing the arrangement as Mr Gill ‘farming his land using my stock’ and that Mr Gill was ‘the boots on the ground’. The FTT recognised the wide range of activities that can constitute agriculture. It noted that Mr Gill and his father had historically farmed the land, that Mr Gill had
continued after his father’s death, and that over time Mr Gill made the land available to others. The tribunal concluded that Mr Gill’s activities had always been and remained that of farming and that the changing nature of the business was not enough to alter this. This led to BPR being available on the value of the barn, outbuildings and land. Critically, since Mr Gill was considered an active farmer, it followed (the remaining conditions satisfied) that the farmhouse should qualify for APR. This decision is welcomed in the farming world and will help provide some assistance to other farmers hoping to claim APR on a farmhouse where the land is grazed by others. It is clear from the judgment that being able to provide evidence of the activities undertaken played a vital role in the decision. It is important to ensure that where grazing agreements are in place these are well drawn up and make it clear that the landowner farmer has the responsibility for and does in fact ’farm the land’. Additionally, what happens in practice needs to reflect the agreement in place. We are seeing more challenge from HMRC on APR and BPR. Keeping adequate records and ensuring the accounts clearly support the work the farmer is undertaking are a must. Having photo and witness evidence to support the facts being a bonus. If you would like a review of your current APR/BPR position or any advice on inheritance tax please contact one of our team.
Is your accounting package working for you? The majority of businesses from small family run farms to large agri-businesses to country estates will be using some form of digital accountancy package as a way to prepare VAT returns, produce reports to help create the year end accounts or create detailed cash flow forecasts. Over recent years online and cloud-based accounting packages have entered the market to compete with the more traditional accountancy packages. This increased competition has spurred major advancements in accounting software and increased the functions offered by many packages. Not all these increased functions are being fully utilised by all businesses, meaning the software may not be used to its full capabilities. Unless you are a technology wizz or have been given help and support with your accounting package it is quite likely you are not utilising your software to its full potential. Or, alternatively, due to business growth and changes to the accountancy package you are currently using may no longer be fit for purpose. Listed below are 5 key functions that many accountancy packages are now offering:
>
Timesaving automation Automatic functions such as automatic bank feeds or suggesting transaction matches can save time inputting data at source.
>
A dd-on services Add-on services such as payroll, this allows for all functions to be carried out in one software package.
>
E nterprise management Allows for costs to be attributed to certain enterprises within your business so you can see which activities are generating profits/losses and cash.
>
B udgeting and cashflow Having real time data enables businesses to look forward, with both budgeting and cashflow tools helping to make business decisions.
>
M ulti-user and remote access Can allow all parties involved with the business access to data at any time, from any place and often more than one person at any one time.
If you would like help with your existing accountancy package or to discuss the alternatives available, please contact Daniel Webb.
Capital allowances on second hand agricultural buildings When you are buying or selling a building, it is unlikely that your first thought, or possibly any thought will involve capital allowances! Below is a reminder of the reasons why it can be important not to overlook capital allowances when entering into a transaction ACQUISITION In order to maximise future capital allowance claims on a building, the buyer should look to allocate a proportion of the consideration for the property to fixtures. Fixtures are items installed or fixed into the building such as feed or ventilation systems, plumbing, heating and lighting. Some agricultural buildings, such as a tractor shed, are unlikely to have the potential for a significant capital allowances claim. Whereas, there is likely to be considerable scope for a claim within a milking parlour. A purchaser cannot claim capital allowances on fixtures unless the seller has brought them into their capital allowance pool. Provided a review is undertaken in advance of exchange of contracts, this can be rectified by the seller making a claim for the cost in their tax computations. Where the amount of a claim is unknown, a clause can be included in sale contracts requiring the seller to make a claim if requested by the purchaser. Once the fixture value is agreed, a joint election is made by both parties confirming that for tax purposes the fixtures will transfer at the set value. The valuation requires careful consideration and negotiation as the buyer will often prefer a high value to enable them to claim capital allowances and reduce their tax liabilities.
SALE The value agreed under the election will usually be included in the seller’s capital allowance tax computations as disposal proceeds. This may create a taxable balancing charge and therefore a clawback of allowances. If this is the case, the seller will want the valuation to be as low as possible, hence the need for negotiation. PROFESSIONAL ADVICE If an election is not made or is found to be invalid, the buyer will not be able to claim any capital allowances on the agreed value, yet the buyer will have to account for the agreed amount and subsequent claw back of allowances. This will create a situation where these valuable allowances are effectively lost to both parties and any future buyers. The existence and valuation of fixtures needs to be considered at an early stage of a property transaction and taking advice from your accountant before exchanging contracts should avoid a potentially costly mistake.
Who is working for you? There are a number of grey areas in the taxation of farming businesses; whether a worker is employed or self-employed is one of them. Just because your farm worker indicates that they are self-employed, does not necessarily mean they are. A person is self-employed if they run their business for themselves and take responsibility for its success or failure. Self-employed workers are not paid through PAYE, and they do not have the employment rights and responsibilities of employees. Someone can be both employed and self-employed at the same time; for example, if they work for an employer as a farm labourer five mornings a week and in the afternoon they run their own contracting business. The tax consequences of wrongly treating a worker as self-employed when they should be an employee can be very costly and the position for each worker may be different. The onus for applying the correct tax treatment is on the employer and it is the employer who will be liable for any underpaid PAYE tax, national insurance and late payment interest and penalties.
EMPLOYMENT LAW AND STATUS Employment law does not generally cover self-employed people because they are their own boss. However, if a person is self-employed they still have protection for their health and safety and, in some cases, protection against discrimination. Ideally, the self-employed person will have their rights and responsibilities set out by the terms of the contract they have with their client, though this is often not the case. A clearly written contract will help to establish the correct tax treatment. CHECKING THE PAYE POSITION Someone is probably self-employed and should not be paid through PAYE if most of the following are true: >
T hey can hire someone else to do the work;
>
T hey are responsible for fixing any unsatisfactory work in their own time;
>
>
>
They can decide what work they do
and when, where or how to do it;
T hey agree a fixed price for their work - it does not depend on how long the job takes to finish; T hey use their own money to buy business assets, cover running costs, and provide tools and equipment for their work; and T hey work for more than one client.
EMPLOYER’S OBLIGATIONS As an employer there are a number of obligations you should be aware of including: >
They are in business for
themselves, are responsible for the success or failure of their business and can make a loss or a profit; >
>
>
E nsuring the person you employ has the legal right to work in the UK; T aking out employers’ liability insurance;
>
Providing your employee with a
>
written statement of employment which includes details of the job including terms and conditions; >
>
>
t he employee not being able to do their work properly without living in the accommodation provided; or
>
i t is customary for an employer to provide the accommodation and it enables the employee to better perform their duties.
Following the auto-enrolment
processes and paying pension contributions for qualifying employees; and >
you provide living accommodation to farmworkers it can be exempt from tax. The exemption can be due to either:
Registering as an employer with
HMRC and operating PAYE;
Paying at least the national
minimum wage rates. BENEFITS IN KIND The taxation of expenses and benefits in kind is a complicated area and one to watch out for. There are a number of tax free expenses and benefits found in the farming world and these include: >
Living accommodation – where
Mobile telephones – an employee
can be provided with a mobile telephone by the employer without a benefit arising. The telephone and contract should be in the employer’s name.
>
Ancillary property costs – where
there is an exemption for the living accommodation costs this also covers council tax, water and sewerage charges paid by the employer. >
Mileage payments – where an employee is using their own vehicle for business purposes, a tax free mileage allowance of 45p per mile can be made for the first 10,000 miles, dropping to 20p per mile thereafter.
>
C ars and vans – where a vehicle is available to be used, but is not exclusively used by one employee, often no benefit in kind arises. If an employee has exclusive use of a car or van and it is available for private journeys then a benefit in kind is likely to arise.
It is the employer’s responsibility to ensure their workers are correctly taxed and can be subject to penalties for not operating PAYE correctly. If you are unsure how best to treat your farm worker, please contact Lucie Hammond on 01242 68000 or lucie.hammond@hazlewoods.co.uk.
MEET THE TEAM
NICK DEE 01242 680000 nick.dee@hazlewoods.co.uk
NICHOLAS SMAIL 01242 680000 nicholas.smail@hazlewoods.co.uk
LUCIE HAMMOND 01242 680000 lucie.hammond@hazlewoods.co.uk
PETER GRIFFITHS 01242 680000 peter.griffiths@hazlewoods.co.uk
DANIEL WEBB 01242 680000 daniel.webb@hazlewoods.co.uk
SUE BIRCH 01242 680000 sue.birch@hazlewoods.co.uk
SIGN UP TO RECEIVE OUR BUSINESS UPDATES
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. SIGN UP/UPDATE ONLINE: http://bit.ly/hazlewoods
Staverton Court, Staverton, Cheltenham, GL51 0UX Tel. 01242 680000 www.hazlewoods.co.uk / @Hazlewoods 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.