Agriculture News
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Editorial Introduction by Robin Dandie Know your cash flow and manage it Successful businesses make regular projections Entrepreneurs’ Relief Maximising your post-tax proceeds Careful planning can save you money Make sure your key players are covered Capital Allowances A complex calculation Paws off furnished holiday lets Don’t bank on Business Property Relief Inheritance tax blow For farmers, landowners and family businesses Update on Real Time Information and Auto enrolment Know your obligations VAT and land-related supplies in agriculture Take good advice to avoid costly mistakes Agricultural tax cases Capital gains tax Taxable profits versus accounting profit Knowing the difference can help your tax bill It’s Show Time We look forward to meeting you
Johnston Carmichael is the trading name of Johnston Carmichael LLP, a Limited Liability Partnership registered in Scotland (SO303232). The registered office is at Bishop’s Court, 29 Albyn Place, Aberdeen AB10 1YL. The term “Partner”, used in relation to the LLP, refers to a member of Johnston Carmichael LLP. A list of the members of Johnston Carmichael LLP is available for inspection at our offices and on www.jcca.co.uk. Johnston Carmichael is a member of the Leading Edge Alliance, an international association of independently owned accounting firms. Disclaimer: While all possible care is taken in the completion of this newsletter, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained herein can be accepted by this firm. Published by Johnston Carmichael, Bishop’s Court, 29 Albyn Place, Aberdeen AB10 1YL. Registered to carry on audit business in the UK and regulated for a range of investment business activities by the Institute of Chartered Accountants in Scotland. AN/0613
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National Firm of the Year
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EDITORIAL Welcome to the 2013 edition of Agriculture News. Johnston Carmichael has been advising Scotland’s farming community for over 75 years now and we hope, through these pages, to share with you some of our experience and expertise. Key concerns for our clients at the moment are the poor weather, increasing costs, and the unknown outcome of CAP reform, leaving farm businesses under pressure to manage cash flow at a time when bank facilities are not readily available. There are worries too about land succession, changes to capital allowances and the tax implications of diversifying. In our articles, we aim to address as many of these issues as possible, although sadly we are unable to improve the weather. On the subject of diversification we look at VAT and land and property-related supplies in Agriculture, reviewing basic rules for different options. We also put the spotlight on Furnished Holiday Lets, seeing what a recent ruling on one particular case (the Pawson case) can teach us.
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There is more food for thought in our piece on Principle Private Residence relief (PPR). If you are the owner of more than one home you may want to take note. And Entrepreneur’s Relief (ER) comes under the spotlight too, the clear message being that you can’t just assume that you will qualify for it. Get some good advice and do some careful tax planning. Other topics covered include Inheritance Tax, Capital Allowances, and the age-old but ever-critical business of managing your cash flow. And there’s a reminder about Real Time Information (the new payroll reporting regime) and Auto-enrolment (the new pension regime). Both systems are now up and running so you need to be aware of your obligations. Last but not least – shows. As in previous years we will be supporting numerous agricultural shows and events throughout the year so please do make a note of the dates in your diary (see inside back cover) and we look forward to seeing you there.
Robin Dandie Partner and Head of Agriculture Forfar Office T: 01307 465565
June 2013
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KNOW YOUR CASH FLOW AND MANAGE IT With a poor summer in 2012, coupled with rising input prices, banks will be on alert as to possible cash flow problems facing their customers. In addition, with a good harvest for many in 2011, tax bills on the back of this would have been settled in January 2013, at a time of cash flow pressure. It is therefore vital to keep in contact with your bank and accountant to ensure that everyone is aware of the farm’s ability to meet debts as they fall due. Support payments make up a large part of income and profitability for many farming businesses. At the time of writing this article, European Union budget cuts suggest that Single Farm Payment for 2013 is likely to be 10% lower than 2012. This comes at a time where farm borrowing is up 10% to £13.5bn. To not consider the
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impact of these cuts on your own farming businesses and cash flow would not be prudent. The impact of the aforementioned can be documented through forward projections for your business. As accountants, we see different attitudes from our clients towards preparing projections for their businesses. Some will view them as a necessary evil to be completed to keep the banker happy. Others will complete projections regularly and revisit them to compare actual with budgeted and in some cases update them throughout the year. For a business to operate successfully it has to know what income and expenditure streams it has throughout the year and the timing of these. All too often, farmers and other business owners fail to commit the vital facts and figures to paper and instead carry them around in
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their heads. What is obvious to the farmer may not be to other stakeholders, such as the bank. Preparation of projections can therefore help facilitate relationships between these stakeholders and make the running of the business smoother in the long term. The projections will highlight the ebbs and flows of money through the business over the year and will help reveal borrowing requirement. The projections may also help highlight where costs could be trimmed. Projections can range from simple cash flow analysis by month to full projections which include projected Profit and Loss Account and Balance Sheet in addition to the cash flow analysis. The form of projection produced will, in many cases, be dictated by the complexity of the farming operation, scale of borrowing (pressure on funds) and the extent of the information requested by the bank, for example. In addition, if a new venture is being considered, any finance provider is likely to want more comfort/assurance as to the venture going forward and would most likely require more detail. Increasingly, we are helping our clients to complete forward projections for their businesses. So what do you need to provide the accountant with and what are the various stages to produce a typical annual budget? • C ashbook/accounts software for the previous year to gain an understanding of level and timing of cash inflows and outflows. • Month by month analysis of income and costs. • Consider the obvious recurring items of fixed expenditure, such as loan repayments (take from bank loan repayment profile), hire purchase payments, wages, rent commitments, etc. • Factor in anticipated capital expenditure. Get cost and finance quotes for intended purchases and any trade-ins. • Consider VAT position of transactions and best timing of larger taxable purchases, i.e. towards the end of a month or quarter if you are on monthly or quarterly VAT return reporting respectively. • Factor in other known costs in the year, i.e. if seed and fertiliser have been ordered on finance, the timing of payment and overall payment will be known. • Look at income and costs for the previous year and consider for current year. • If any feed contracts have been entered into, for example, these costs could be reasonably well budgeted for given anticipated stock count throughout the year. Agriculture News
• C alculate estimated monthly bank overdraft interest using the rate which you have with the bank and factor in any arrangement fee. • Create projected Profit and Loss Account, which will be derived from the cash flow, with non cash movements such as stock movement and depreciation factored in. • Create Balance Sheet from the cash flow and Profit and Loss Account to tie the exercise together. Once the exercise has been completed, the document should not be assigned to the office filing cabinet and not revisited until the following year. It should be regularly reviewed and updated throughout the year. If cash flow problems are apparent during the completion of the projections, it is worth bearing in mind the following to help you manage cash flow:
Peter Innes Director Stirling Office T: 01786 459900
• C onsider financing machiner y and input purchases, such as fertiliser, to avoid big one-off hits to cash flow. Interest rates for finance available will of course need to be compared against the bank overdraft interest rate which you have. • Timing of finance payments by different farming businesses will vary. For example, a tractor purchase for a cereal farm may be better suited to annual finance payments to tie in with the timing of grain cheque receipts. A dairy farm may be better suited to monthly payments, tying in with the regular monthly milk cheque. • Consider any grants which may be available to reduce the cost of any capital purchases, thus reducing pressure on cash flow. • C onsider capital allowances available on any asset purchase and the effect the timing of this could have on overall tax liabilities and the possibility of maximising any Tax Credit Award which may be available. • If tax bills are large and you may struggle to meet liabilities as they fall due, speak to your accountant, who can liaise with HM Revenue & Customs on your behalf. As can be seen, preparation of a set of projections can also help with tax planning, which in turn can help business cash flow and viability. The take home message is communicate – with your advisers and other stakeholders in the business, such as the bank, so that unexpected shocks are minimised. 5
ENTREPRENEURS’ RELIEF Maximise your post-tax proceeds
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At Johnston Carmichael we provide tax and accountancy services to over 1,500 farmers. Our recent agriculture seminars hosted over 500 attendees, and highlighted some of the issues which farmers currently face. Two of the most pertinent issues for landowners are the drive towards renewable energy and selling parts of the land for other use (usually for development). The purpose of this article is to examine how Entrepreneurs’ Relief may apply to the sale of land. Qualifying disposals The legislation provides for several types of disposal to qualify for Entrepreneurs’ Relief. Here we look at the issues for farming partnerships. When a farm is being sold in its entirety then, with some planning, it should be possible to qualify for the 10% rate of capital gains tax on the sale of the business. If only some of the land is being sold, it may also qualify for Entrepreneurs’ Relief, but this depends on whether there is a disposal of ‘part of a business’. This issue arises frequently, and many farming related cases have been examined in court. The disposal of a few acres would, in normal circumstances, not be enough to meet the ‘part of a business’ test. In August 2012, the Russell case considered whether the sale of 6.72 hectares (out of a total holding of 21.65 hectares) for development was sufficient to be ‘part of a business’. Mr Russell held a one-third interest in the land and was in partnership with his brother and sister-in-law. The taxpayer conceded in court that the farming activity after sale carried on as it had before sale, albeit that they had one field fewer. This was fatal to the claim for Entrepreneurs’ Relief as the business carried on as before, and it could not be said that this was the disposal of ‘part of a business’. So if you are selling only a few acres, what else can be done? Case study We have recently advised a farming partnership which would shortly be disposing of a few acres of farmland to a housing developer. In the absence of any tax planning, the gain chargeable would be taxed at 28% as it would not qualify for Entrepreneurs’ Relief. For example, on proceeds of £1 million, the tax charge would be approximately £280,000. A simple suggestion was made for two partners (each with a one-sixth interest) in the partnership to retire before the Agriculture News
land was sold. This would enable one-third of the sale to qualify for Entrepreneurs’ Relief (i.e. Capital Gains Tax payable at 10%). This idea alone would save £60,000 in tax. While this represented a large tax saving, there was still a significant gain chargeable at 28% (on the remaining partner’s two-thirds interest). We were able to rearrange the interests in the partnership so that on sale, the whole of the gain should qualify for Entrepreneurs’ Relief, with tax payable at only 10%. This should result in a total tax saving of £180,000 (for each £1 million of proceeds).
John Todd Partner
“ It may be possible to significantly improve the tax position by taking a few intermediate steps.”
Inverness Office T: 01463 796200
Associated disposals One further way in which a disposal may qualify for Entrepreneurs’ Relief is if there is an ‘associated disposal’. This applies where an individual owns an asset personally, but this has been used by the farming partnership. To qualify for Entrepreneurs’ Relief, the individual also has to withdraw from participation in the business. Each case will turn on its facts, but it may be possible for this to apply when a partner only reduces their profit share. There are other conditions which apply and these would need to be considered. The main difficulty with ’associated disposals’ is that the availability of Entrepreneurs’ Relief is often restricted where some of the assets have been used for non-trading (eg. farming) purposes. For example, the letting of a cottage, steading or some land could mean that the part of the gain does not qualify for Entrepreneurs’ Relief. This can significantly increase the tax due. Before any sale is contemplated, the tax position should be considered as it may be possible to significantly improve the tax position by taking a few intermediate steps. 7
CAREFUL PLANNING CAN SAVE YOU MONEY
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Most businesses and farms understand the need to manage the risks they face every day. They insure their equipment and stock against fire, flood and theft, but many don’t stop to think about what would happen if they lost their most important asset – their people. Most businesses may have at least one key person in their business (someone whose death or serious illness would impact on company profits). As well as being unable to cope with the death of a key person, very few businesses will have the cash available to buy a shareholder’s shares or a partner’s or member’s interest if they die. Without this means, the interest will automatically pass to the deceased’s family or estate and may cause disruption to the business. A business will often have partnership agreements and articles of association which deal with the business succession issues on death or long term illness. These agreements may have clauses that determine how the partnership share will be dealt with on death but not how these transactions will be funded. Protect against death and serious illness Why then do so many businesses remain resistant when it comes to having the correct plans and procedures in place to ensure death or serious illness does not affect the daily running of the business? Business Protection can make sure the funding is in place and ensure that the correct person or company receive the funding to complete a clean succession of the business interests. This involves partners and shareholders insuring each other’s lives to cover the cost of purchasing their share of the business should they fall ill or die. For example, Tom and James have a 50% share each in a farming business and therefore insure each other for their share in the business. Should one of the brothers die then the Business Protection Plan would pay out the value of their share in the farm to the other brother allowing a smooth transition and continuity of the business. Another example might be where Tom is the partner who manages the financial side of the farm and James is more involved in the manual side. If something happened to Tom then a Key Person plan would cover Tom’s life which could fund a Farm Manager to replace Tom and allow James to continue running the practical side and ensure the business continues. This might be very important if Tom was the major partner responsible for negotiating loans with the Bank and his death might cause the bank some concern.
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Cover Inheritance tax liability Another area where a protection plan can save money is to cover an Inheritance Tax liability on death. This might be through the simple use of a Whole of Life plan to cover the Inheritance Tax liability due on death by the beneficiaries. In this instance the plan would be taken out on the parents on a second death basis with a guaranteed premium payable throughout the life of the plan and written in trust for the sons and daughters who are the beneficiaries of the estate. The level of cover should be sufficient to pay any inheritance tax liability due on the estate payable on the second death of the mother or father. The guaranteed premiums ensure the cost of this cover never increases during the duration of the plan – simple and effective.
Mark McKenzie Financial Planner Aberdeen and Huntly Office’s T: 01224 212222
Protect your gifts Finally, many parents would like to pass on a substantial gift prior to death in order to remove the value of the gift from the estate. If the person making the gift dies during the next seven years then tax would be due on the value of the gift under Potentially Exempt Transfer (PET) rules. If the parent was to take out a Gift Inter Vivos Protection Plan written in trust for the child or children to cover the tax due over the next seven years, this would ensure a better outcome for the persons receiving the gift. For example – Peter received a Gift two to three years ago from his father of £1,025,000. This was the only gift his Father had made during his lifetime. His father has just died aged 75 and Peter is liable for a tax bill of £280,000 on the failed PET. The result is that Peter’s inheritance is reduced to £745,000. A Gift inter Vivos protection plan in Trust for Peter to the value of the tax due, at a guaranteed premium of £410.84 per month (total premiums paid for 3 years of £14,790.24) would have covered the liability for IHT. The result being a net inheritance to Peter of £1,025,000 less £14,790 = £1,010,210, making Peter £265,210 better off. If you feel that any of these situations may be relevant to you do please get in touch to discuss how best to manage your risks. The information provided in this article is based on Johnston Carmichael Financial Services Ltd understanding of current legislation which may be subject to change. Johnston Carmichael Financial Services Ltd is authorised and regulated by the Financial Conduct Authority. Registered in Scotland No. 81852 Registered Office, Commerce House, South Street, Elgin, IV30 1JE.
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CAPITAL ALLOWANCES A complex calculation
In his Autumn Statement on 5 December 2012 the Chancellor, George Osborne, announced that the Annual Investment Allowance (AIA) would increase to £250,000 from 1 January 2013 for two years, which is an increase to the £25,000 which came into force on 6 April 2012. This now makes the calculation of the available AIA more difficult, in particular for businesses with a year end between 1 January 2013 and 5 April 2013, as these accounting periods now straddle three different AIA rates: Graham Leith Director Inverurie Office T: 01467 621475
• f or the period to 5 April 2012 the AIA is a proportion of £100,000 • from 6 April 2012 to 31 December 2012 the AIA is a proportion of £25,000; and • for the period from 1 January 2013 to the year end the AIA is a proportion of £250,000
capital expenditure incurred during the period 1 March to 5 April 2012 which exceeds the limit of £9,863 for that period. For expenditure falling on or after 1 January 2013, the maximum allowance is the sum of the maximum allowance for the periods from 6 April 2012. If no qualifying expenditure was incurred before 6 April 2012, that part of the business’s potential maximum entitlement cannot be claimed on expenditure incurred on or after 1 January 2013. You will appreciate that the calculation of the available AIA is complex. Should you have any queries, please do not hesitate to contact your usual Johnston Carmichael contact.
Although this appears straightforward in that you calculate the AIA proportion for each period to give the total AIA for the year, this is not the case. The AIA available is dependent on when the capital expenditure is incurred and is not necessarily the AIA calculated for the period in which the expenditure is incurred. The maximum AIA for any expenditure in the period prior to 5 April 2012 is the amount that would have been the maximum allowance for the year had the temporary increase in allowance not been increased to £250,000. For expenditure on or after 6 April 2012 but before 1 January 2013, the maximum allowance for expenditure in this period is the proportion of AIA from 6 April 2012 to the year end had the temporary increase to £250,000 not been made. So, in the example of a year end of 28 February (see below), the maximum AIA for this period is 329/365 x £25,000 = £22,534 less any
Example Let us consider an example. For a sole trader or partnership with a year end of 28 February 2013 the maximum AIA on expenditure prior to 5 April would be:
For the period 1 March to 5 April 2012
36/365 days x £100,000
£9,863
For the period 6 April 2012 to 28 February 2013 329/365 days x £25,000 £22,534 £32,397
Therefore, the maximum AIA for capital expenditure prior to 5 April 2012 would be £32,397.
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PAWS OFF FURNISHED HOLIDAY LETS
Donna Harper Partner Elgin Office
With the reduction in the farming workforce over the years leaving empty housing behind and the conversion of disused farm buildings, Furnished Holiday Lets (FHLs) have sprung up around the countryside and provide a useful source of diversified income to the farming community, in addition to their tax advantages. A recent decision of the Upper Tier Tax Tribunal on 28 January 2013 in respect of the Pawson case, however, could see the availability of Business Property Relief (BPR) on some Furnished Holiday Lets denied. The Pawson case Up until now, provided a certain level and type of services were being provided to holidaymakers renting an FHL, business property relief at 100% was available for IHT purposes. Given the high value of such properties, this is a valuable relief and it is important that farmers and landowners seek to ensure their FHL qualifies for it. The Pawson case, however, saw HMRC dispute whether a business existed at all and if a business did exist, whether the business was mainly one of holding investments and therefore did not qualify for BPR. The FHL in question was situated at the sea in Suffolk and the property had been run for a number of years by Mrs Pawson and her three adult children. On Mrs Pawson’s death, the Executors of her estate claimed BPR on the FHL on the basis that the FHL was a qualifying business. HMRC rejected the claim for 100% BPR on Mrs Pawson’s 25% share and the case went before the First Tier Tribunal which ruled in favour of Mrs Pawson’s executors. The case was appealed by HMRC to the Upper Tier Tribunal which rejected the First Tier Tribunal’s decision and confirmed that although the Pawsons were carrying on an active business of letting to holidaymakers this business was one of an investment nature. Agriculture News
The Upper Tier Tribunal cited activities which fall on the side of investment activities as including taking steps to find occupants, making the necessary arrangements with them, collecting rent, incurring costs on repairs, redecoration, maintaining the gardens and grounds and insuring the property. All of these activities were felt to maintain/enhance the capital value of the property and enable a regular income to be obtained from it.
T: 01343 547492
The final ruling Whilst certain services were provided to occupants of the FHL – such as a cleaner who cleaned the property between each letting, a television and a telephone, a welcome pack, and the owners were on call to deal with emergencies and replenish cleaning materials as and when necessary – the tribunal questioned, based on case law, whether such services were material enough to prevent the business from being one of mainly holding an investment. The tribunal ruled that the property was being held as an investment and not run as a business with the services provided all being of a relatively standard nature and BPR was denied. HMRC are increasingly focusing on FHLs and the services being provided in assessing whether or not such activities qualify as a business. There are ways in which an individual can strengthen the business being carried out within their FHL particularly through the provision of additional services. In terms of the level of activities needed to tip the balance of the FHL to being a business rather than an investment activity then each individual case will be different and advice should be taken from your Johnston Carmichael adviser. Activities such as the provision of daily newspapers, updating holiday makers on local events, booking and arranging activities, and so forth, all help to strengthen the case. 11
INHERITANCE TAX BLOW
For farmers, landowners and family businesses
Alex Docherty Director of Tax Edinburgh Office T: 0131 220 2203
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Like most things in life, tax rules are always changing. With the 2013 budget passed, followed by the release of the draft legislation for the Finance Bill 2013, our tax advisers continue to face the challenge of keeping abreast of ‘what’s new’ and advising our clients accordingly. Contained within some 629 pages of the Finance Bill is a significant shift in the rules for individuals and Trusts which is likely to increase an individual’s Inheritance Tax (IHT) exposure where liabilities taken out to acquire, maintain or enhance agricultural property, business property and woodlands have been financed against other non-qualifying assets for IHT purposes. To date it has been fairly common practice to fund investment in one’s business by way of taking out a loan over personal assets, such as a long let property. This in turn reduced the value of the long let on death (as it was reduced by the debt), and the Estate’s overall exposure to IHT. The agricultural property that the loan was used to acquire was protected in its entirety from IHT in any case through the availability of agricultural property relief. The changes within the Finance Bill, if enacted as they stand, mean that a tax deduction for IHT purposes will not be available for liabilities secured against non-IHT qualifying assets where the funding has been put in place to finance directly or indirectly the acquisition,
maintenance or enhancement of an IHT qualifying asset (such as agricultural land). Therefore, on a chargeable event, the debt taken out, for instance, indirectly to finance a purchase of land will be offset against the value of that IHT qualifying asset, with agricultural property relief and/or business property relief reducing any remaining value of this asset. The non-qualifying asset (i.e. the long let property) on which the loan was taken, will remain fully exposed to IHT. As the draft legislation proceeds through Parliament and the House of Lords, it is possible that it will be subject to further changes. Despite the lack of certainty at this time as to the final version of the legislation, an initial review of your personal IHT position, in particular the structuring of loans within your business and non-business interests, should be undertaken and your local Johnston Carmichael adviser will be able to help you with this. Structuring debts between a husband and wife may be one way of mitigating the impact of this change, although we will need to wait until the legislation is enacted before the position is clearer. Going forward, there is an even greater importance to have a clear paper trail as to how agricultural, business and woodland assets are acquired and how funding taken out over non-IHT qualifying assets has been applied.
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UPDATE ON REAL TIME INFORMATION AND AUTO ENROLMENT Lauren Miller, Tax Manager in our Forfar office, has a keen interest in employer - related issues and has been keeping up to date with HM Revenue & Customs’ (HMRC) guidance and advice on the new PAYE procedure known as Real Time Information, or RTI as it is often referred to. She believes that farming businesses in particular, who employ more seasonal workers than most and pay cash at the end of the working day, face increased challenges when it comes to RTI. Whilst RTI may be the new kid on the block, the obligation on employers to provide workplace pensions must not be forgotten. RTI – what is it? RTI now requires most employers to submit PAYE income tax and NIC information to HMRC electronically ‘on or before’ earnings are paid. However, in acknowledgement of problems that some employers may face, which is loosely aimed at farming businesses, HMRC have announced a relaxation for some of the rules. HMRC accept that it is impractical for employers to report in real time where an employee is paid in cash at the end of the day. They cite crop pickers as an example but it could also extend to wages paid to beaters. In these circumstances, employers may have up to seven days to report their pay to HMRC. Furthermore, in a last minute update from HMRC but only a temporary measure until 5 October 2013, they will allow employers with fewer than 50 staff and who run monthly payroll but pay more frequently to send information to HMRC by the date of their regular payroll run but no later than the end of the tax month. Does this affect me? Employers where any employee earns above the National Insurance Lower Earnings Limit (currently £107 per week) or where any employee is due to pay tax, are obliged to report in real time. All casual workers must be included on the payroll too. RTI should not affect employers where all employees earn below the National Insurance Lower Earnings Limited and there is no liability for any employees to pay income tax. When is this happening? RTI is here! Most employers have been legally required to comply with RTI from 6 April 2013 with all employers operating RTI by October 2013.
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Automatic enrolment – what is it? Currently the Government estimates that around 7 million people have little or no provisions for retirement. In a move to encourage more people to save for their retirement the Government rolled out measures that will place new duties on employers to automatically enrol all ‘eligible jobholders’ into a qualifying pension scheme.
“ The obligation on employers to provide workplace pensions must not be forgotten.”
Lauren Miller Tax Manager Forfar Office T: 01307 465565
Does this affect me? Employers have to automatically enrol workers including contract and temporary staff who: • a re not already in a qualifying workplace pension scheme • are at least 22 years old • are below state pension age • earn more than £8,105 a year; and • work or ordinarily work in the UK Employees can opt out of the scheme by telling their employer their wish to do so. When is this happening? Automatic enrolment is already here too! It came into effect from 1 October 2012 but when you have to enrol your employees will depend on the number of employees in your organisation. The introduction of RTI and Auto enrolment has almost certainly placed additional pressures on employers. On the face of it, HMRC do now accept that certain businesses, including the farming sector, could face complex situations when it comes to RTI, some of which may not have yet been examined. Our team of employment tax specialists actively follow HMRC’s guidance and advice on RTI as it is released and can help you avoid falling foul of the penalty regime. Furthermore, Johnston Carmichael Financial Services can assist you with ensuring that you comply with your auto-enrolment obligations.
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VAT AND LAND-RELATED SUPPLIES IN AGRICULTURE The continuing diversification of farming businesses into land and property-related supplies can have significant VAT implications for the business as a whole. If consideration is not given to VAT at the outset of any intended land-related activity, there is scope for making some costly mistakes. Please note that for VAT purposes, any reference to ‘land’ includes the land and fixtures to it – be that a house, a steading or a wind turbine, etc. The basic rules A supply of land is generally deemed to be exempt from VAT. The fact that the business does not have to charge VAT sounds like a good thing, especially if customers are not VAT registered; however a VAT exempt supply is a double-edged sword with additional implications for related expenditure. Where a business makes a VAT exempt supply, any VAT incurred in making that supply is not normally recoverable. For example, if a building is constructed with a view to providing a VAT exempt lease, the VAT incurred on the construction costs is irrecoverable, and there could also be a restriction to the VAT that can be recovered on business overheads (subject to ‘de minimis’ rules, which permit recovery of small amounts of Input VAT relating to exempt supplies).
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This ‘partial exemption’ position is not a new concept for many farms, where the exempt letting of cottages on the land is commonplace. In most cases, (other than supplies of domestic dwellings) a business which makes a supply of land has the opportunity to ‘opt to tax’. The notification to HMRC of a decision to opt to tax the land results in a VAT exempt supply becoming a taxable one. This provides assurance that VAT incurred on related costs can be claimed back from HMRC; however, the option to tax remains in place for a minimum period of 20 years and supplies of the land may be subject to greater Stamp Duty Land Tax charges. The supply of a building or land for self-storage Following recent VAT tribunal cases, HMRC have determined that such supplies are excepted from the basic rule and are automatically taxable. From 1 October 2012, the provision of space used for the self-storage of goods in structures such as containers and units of buildings is subject to VAT at the standard rate. Supplies of grazing land and livery Another exception to the basic rule is a supply of land for grazing, which includes grass livery for horses. These supplies are taxable, but at the zero-rate of VAT. As with
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supplies of self-storage, it is important to clarify that the supply is purely of grazing land. There are different VAT liabilities for similar supplies, for instance: • D IY livery – assumes the exclusive provision of a stable and normally bedding such as straw and hay but without any additional services provided by the landowner. This type of livery is treated as VAT exempt (in contrast with a supply of ‘storage facilities’); however, the business can opt to tax. It is also able to zero-rate separate supplies of feedstuffs, provided that there is no additional element of care for the animals. • Full livery – when additional services are provided; i.e. turning the horses out, cleaning the stable, feeding, watering, etc. If the livery contract is worded to say that the principal element is of stabling, then the whole livery package is an exempt supply of land. Where the contract is for livery services without the exclusive use of a stable, perhaps including schooling or breaking in services, the whole supply is standard-rated including the supply of animal feed. Supplies of accommodation to temporary workers As mentioned above, the supply of domestic
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accommodation is VAT exempt (excluding accommodation in a hotel, guest house or holiday home which is standardrated). Where accommodation is provided to an employee for payment, this is VAT exempt income and it may cause the added complications associated with ‘partial exemption’. An alternative to consider is to make the accommodation part of the employee’s remuneration package. Not only will the business avoid receiving VAT exempt income, it may also benefit from a reduction in liability for National Insurance contributions for the employees. David Urquhart
Supplies of renewable energy Many farmers are becoming involved in the production of renewable energy, particularly with wind farms. The VAT implications with activities in these areas are numerous and separate advice should be sought; however, if VAT is to be claimed on the often considerable costs to install means of producing renewable energy then VAT will normally be due on the export element of feed-in tariffs paid when energy is provided to the grid. Our VAT team will be happy to discuss any of the above in more detail, to ensure that there are no hidden costs and compliance implications for the business are considered. If you would like more information, please speak to David Urquhart or get in touch with your usual Johnston Carmichael adviser.
VAT Manager Aberdeen Office T: 01224 212222
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AGRICULTURAL TAX CASES Capital Gains Tax
Neil Steven Director Edinburgh Office T: 0131 220 2203
The application of Capital Gains Tax (CGT) arises when a capital asset is disposed of at a profit. The concept of a disposal includes a sale, gift and loss/ destruction of an asset. Chargeable assets are those which are not specifically exempt. The primary capital assets relating to farms and landed estates are likely to be the land, farmhouse and other residential properties. Since 2005 land values have risen substantially so it may be argued that the associated tax risks are now far greater than a decade ago. Within the parameters of CGT there are reliefs available to individuals which can be claimed to help minimise the tax cost from the chargeable disposal of a capital asset. A couple of recent tax cases have demonstrated the operation of the reliefs – Principal Private Residence Relief and Entrepreneurs’ Relief – and the importance of credible evidence to strengthen an argument to claim the relief. Principal Private Residence Relief (PPR relief) PPR relief is the relief an individual taxpayer receives when they make a capital gain on the sale of their only or main residence. The relief exempts all or part of the gain which arises on a property which an individual has used as their home. A chargeable gain will only arise if the taxpayer has been absent from the property at some point during their period of ownership.
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As a general rule, a taxpayer can only have one principal private residence at any given time. The PPR rules provide that the last 36 months of ownership of a property is always treated as exempt, as long as the taxpayer has actually occupied the property as their private residence at some time beforehand. If a taxpayer has more than one private residence and no action is taken, HM Revenue & Customs (HMRC) will determine which of the two properties is to be treated as the PPR for CGT purposes as a matter of fact. Usually the property which is most commonly used as a main residence will be regarded as the PPR. However the taxpayer can instead make an election to nominate one of the residences as their PPR for CGT purposes. This need not necessarily be the residence in which the taxpayer spends the majority of their time, although it is necessary for the individual to actually reside in both residences from time to time. Normally the taxpayer will elect for whichever of the properties is standing at the largest capital gain to be their PPR. If a taxpayer wishes to nominate which of their residences is their PPR, they must make an election to that effect within two years of acquiring the second property.
Johnston Carmichael
The case of M J and Mrs B A Harte A recent case – M J and Mrs B A Harte (TC1951) – considered the quality of occupation and whether this amounted to residence within the meaning of the legislation in order to claim PPR relief.
THE DECISION
THE FACTS • M r and Mrs Harte lived in a property as their main residence which they had bought in 1969. • A second house, Alder Grove, was inherited in 1992 by Mr Harte from his father, which was occupied by his stepmother as her residence until she died in May 2007. • In June 2007 Mr Harte transferred to his wife a joint interest in Alder Grove after his stepmother’s death. • In August 2008, Mr and Mrs Harte elected for Alder Grove to be their main residence for the period 11 October 2007 to 19 October 2007. Although their first home was only six miles away, they claimed to stay in Alder Grove regularly and treated both properties as homes simultaneously. • Mr and Mrs Harte kept no records of the periods they stayed in Alder Grove and they did not ensure the bills were in their own names. • Mr and Mrs Harte sold Alder Grove in October 2007 and claimed PPR relief. The couple stated they had intended to make Alder Grove their home and live there briefly. They received an offer from a neighbour to buy the property and they decided to accept that offer. • The longest time that the couple lived in Alder Grove was three weeks. • They did not move any of their own possessions into Alder Grove and they did not carry out any work on the property. • They had spent short periods in the house to test what it would be like to live there. • HM Revenue & Customs disallowed the claim and assessed the couple to CGT, as they did not consider the occupation was permanent enough to satisfy the legal requirements. Agriculture News
• T he First-tier Tribunal rejected the claim for PPR relief. • The rejection was not on the basis of the short period it applied to, but because there was no evidence of Mr and Mrs Harte ever occupying Alder Grove with any degree of permanence or continuity. FUTURE CONSIDERATIONS • T he decision is this case does not rule out the possibility to make such a claim, but simply reinforces the principles of the need for fact, evidence and permanence of actual occupation. • A temporary lodging situation is unlikely to be sufficient to claim PPR relief. • Over the last decade the nature of farming has changed from pure farming through diversification which has, in instances, put the eligibility for claims for agricultural tax reliefs, particularly Agricultural Property Relief for Inheritance tax purposes, in doubt for certain areas of the farm, for example the farmhouse. • A s a result, farmers and land owners have to look to the protection of other reliefs, including PPR relief, by reviewing current ownership and occupation of their residential property to check whether potential claims are protected at such time. This case is a reminder that availability of relief should not be taken for granted. (See also the case of W S G Russell discussed in ‘Entrepreneurs’ Relief – maximise your post-tax proceeds’, page 6). There is also the clear message that accurate record keeping by the taxpayer and advisers is essential. 17
TAXABLE PROFITS VERSUS ACCOUNTING PROFIT In any set of accounts we prepare, there is usually a difference between the profit which is reported in the set of accounts, and the profit which will be used to calculate tax for HM Revenue & Customs (HMRC). There are many reasons for the differences, such as adjustments for wayleaves, rental income and interest which are taxed separately.
Sheena Ross Senior Client Relationship Manager Fraserburgh Office T: 01346 518165
Allowances on assets Currently one of the main differences is in the calculation on the writing down of assets. In the accounts, assets are written down over their useful lives (usually 20%-25% per year is taken as the annual usage cost). But for tax purposes it may be possible to write off the whole amount of the asset in the first year (please see separate article on capital allowances, p. 10). This makes the taxable profit much lower than the accounting profit resulting in reduced tax in the current year. The following year though, there is now an asset in the accounts which will be depreciated at another 25%, but all the tax allowances for this asset have already been used in the previous year. Therefore, if there are no further asset purchases, the accounting profit will be lower than the taxable profit. In a limited company, we would create a deferred tax charge in the accounts to smooth out the tax charge over the asset’s life, but this is not done for partnership or sole trader accounts. This situation can be quite complicated to understand but the following example shows that a farm making similar profits of £40,000 for two years can have dramatically different tax bills to pay in each year if a new tractor is purchased in year 1. The tractor cost £50,000 and has been depreciated through the accounts at 20% straight line. In this example, in year one the client would get a tax holiday, but in year two there would be an unpleasant tax surprise.
Private use adjustments Another area which can also create confusion is the private use adjustments, which can either be made on the face of the farm accounts, or can be adjusted in the tax computation. These are the adjustments for items usually paid for by the farm, but where a part of the use would be private, ie. electricity, phones, council tax, motor expenses. In the case of the council tax, this is a straight forward adjustment of two-thirds private, as this is stipulated by HMRC for standard farming enterprises. But for the other categories, this will vary from business to business (and may change from year to year if the farming mix changes). You therefore need to think about how much of these expenses relate to the farm and how much to the farm house. Electricity, for example: is there equipment on the farm that requires high electricity usage, ie. potato dressing, grain drying, heating or ventilation? If there are any changes to the farm, then you should discuss these with your adviser and readdress the private use calculations to ensure they are based on the current farming business. Averaging Averaging is a tool which can be used for farming enterprises which can help smooth the profits between different years, and therefore can also smooth the tax bills by making the best use of tax bands and rates, and can also help cash flow. This whole situation is complex with many reasons for a difference between the accounting profit, the taxable profit and ultimately the tax bill. It is best managed by making sure that your accounts are completed as early as possible so that the best use of all allowances can be made, and if there are higher tax bills, they can be communicated early so that there is time to make provision for the tax payments due.
Year 1 Year 2 Profit per accounts 40,000 40,000 Add back depreciation on new tractor Tax allowances on new tractor
10,000 (50,000)
10,000 ( nil )
Taxable profit nil 50,000
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Johnston Carmichael
It’s Show Time…
Johnston Carmichael has over 75 years’ experience of advising Scotland’s farming community. The sector has always made up a very significant proportion of our client base and we continually build on our specialist knowledge and expertise. This summer the Johnston Carmichael exhibition unit will be at the following shows and we look forward to welcoming you for a refreshment and a chat. Angus Show Royal Highland Show Black Isle Show Perth Show Turriff Show
8 June 20-23 June 1 August 2-3 August 4-5 August
We are also supporting shows at Alyth, Banchory, Caithness, Doune and Dunblane, Echt, Grantown, Haddington, Keith, Kirriemuir, Nairn, New Deer and Stirling.
Let’s talk about growing your business. www.jcca.co.uk
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For further information and advice please contact your nearest Johnston Carmichael office:
Aberdeen
01224 212222
Edinburgh
0131 220 2203
Elgin
01343 547492
Ellon
01358 720712
Forfar
01307 465565
Fraserburgh
01346 518165
Glasgow
0141 222 5800
Huntly
01466 794148
Inverness
01463 796200
Inverurie
01467 621475
Perth
01738 634001
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01786 459900
www.jcca.co.uk