Taxing issues for diversified farms


There is a lot of uncertainty around the farming sector at present and many farmers are looking to diversify in order to manage risk.

Many people see diversification as the answer to risk, but to diversify successfully you need to have a strong core business. If the central business is not strong, then diversifying can risk both the old business and new.

There are a number of diversification options available but each comes with added accountancy, tax and VAT implications.

A few key things to consider are:

  1. Company Tax

Plant and machinery purchased for a new enterprise should qualify for 100% tax allowances which could generate taxable losses in the first year. These losses can then be carried forward and offset against future profits.

It’s important to note that each individual trade is taxed separately so taxable losses from one trade may not be able to be offset against another. It should not be assumed that a loss in one activity will automatically reduce the tax payable on another activity. 

Care also needs to be taken if you plan on trading in any plant and machinery from the existing farming business as a balancing charge could arise and increase your tax bill.

  1. VAT

Diversification brings about a VAT element that may not always be considered.

Most incomes sources are subject to VAT (standard-rated, reduced-rated and zero-rated) but some activities may be exempt from VAT. Where a business has taxable and exempt income then ‘partial exemption’ calculations must be carried out, often causing confusion and uncertainty on the recovery of VAT on costs.

Subsequently, what may appear on the face of it as a simple undertaking, can quickly turn into a VAT minefield. Incorrect VAT returns submitted to HMRC can have serious consequences, including assessments for underdeclared VAT, interest charged on underpaid VAT and the potential of financial penalties for errors in a VAT declaration submitted to HMRC.

Additional consideration should be given to setting up the new enterprise as a separate entity. VAT registration will be required if the taxable turnover of the entity is over £85,000.

  1. Inheritance Tax

Agricultural Property Relief (APR) is available to reduce the agricultural value of agricultural assets for the purpose of inheritance tax. However once an asset is not used for agricultural purposes, the risk of taxation on death will increase.

However, even if APR would be removed, as long as the diversified activity is a trading business, the assets in use are likely to be eligible for Business Property Relief (BPR) instead, which is also an inheritance tax relief.

In order to claim BPR there are a few conditions which must be satisfied:

  • There must be a business.
  • The business must have been owned/operated for two years before death.
  • The business must be a wholly or mainly trading business.
  • It must not be subject to contract for sale.

One further pitfall to watch out for is if the new activity is of an investment nature such as furnished holiday lets, this could compromise the BPR position of the whole business.

We’ve had some great conversations with our clients regarding diversifying and the subsequent effects, and we should be delighted to speak with you too. By thinking about tax, taking advice and planning accordingly, you will be able to benefit from diversifying without comprising your tax position.

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