Taxing times ahead
1 December 2009
Farming
The credit crunch will affect farmers and landowners as much as others, not least as a consequence of the severe shortage of public funds available. The Government has been issuing debt - "Quantitative Easing" (of £200 billion this year) - in effect in order to make their books balance. But ultimately this has to be repaid by the taxpayer, which will only be achieved if taxes rise or public expenditure falls. Rampant inflation might help with time to reduce the real value of the debt, and that too is a risk, although deflation appears more likely in the short term.
What are the implications of this public funding problem for farmers and landowners? George Chichester, Partner with Strutt & Parker explains.
Of immediate impact will be the reversal of last year's cut in the VAT rate - which is currently at a concessionary 15%, but goes back up to 17.5% on 1st January 2010. For expenditure for which the VAT is not recoverable, it might be worth advancing purchases in order take advantage of the lower rate. For example, repairs to estate cottages or to cottages which are occupied by private staff or are let without the benefit of partial exemption.
Then there is income tax. Farmers' profits can vary considerably from year to another - take for example the bonanza profits for arable farmers from the 2007 harvest resulting from high sale prices and low input costs, and contrast this with the low profits from the 2009 harvest, for the opposite reasons. However farming businesses have the benefit of "averaging" which helps to make best advantage of the sliding scales of Income Tax. However, for any business (or individual) earning over £150,000pa following next April, the top rate of tax will be 50%, and in addition to that the personal allowance will be withdrawn, which makes the effective rate somewhat more than 50%. Agricultural Buildings Allowances have been withdrawn, so re-investment of profits into new buildings will not be tax allowable. Larger businesses might therefore be facing a big increase in tax rate as from next spring. With interest rates low, such businesses may be wise to accelerate profits in order that they are taxed at the current (lower) rate, for example by selling grain before the year end, or deferring expenditure.
Next, Capital taxes. These also will inevitably remain under the spotlight - for a Government which is desperate to find ways to raise additional public funds in a politically acceptable way. Even though it was defeated, the Revenue's argument in the Nelson Dance case, to the effect that farmland used in a farming business was not a business asset, was evidence of the fact that the Government is prepared to question established principles and to find any possible loophole for increasing tax take. With capital values currently to depressed for certain assets - particularly dwellings and possibly stocks/shares - and with Capital Gains Tax rate having reduced to 18%, now might be a good time to be considering inter-family transfers where these are consistent with a family's long term intentions.
As with all tax planning schemes, advice should be taken from your accountant.
In addition to prudent tax planning, farmers would be advised to make the most of the various grant and subsidy support schemes on offer too, noting that all EU Member States will be questioning current expenditure under the CAP as part of the EU's Budget Review over the next year and there are bound to be calls from some sectors for this to be reduced or reallocated.
For more information, please contact
George Chichester, Farm & Estate Management, Strutt & Parker
Telephone: 01635 576914