scruttonbland.co.uk
AND FARMING AGRICULTURE
A time to reflect but also to look forward to the year ahead…
How to thrive, not just survive: farming conference
VAT agriculture – partial exemption
Contents
3 Welcome to our Winter edition of Agriculture and Farming
4 A time to reflect but also to look forward to the year ahead…
6 How to thrive, not just survive: farming conference
8 VAT agriculture – partial exemption
10 Securing Your Family Farm’s Future: How Trusts Can Aid Succession Planning
12 Meet the Team
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Welcome to our Winter edition of Agriculture and Farming
As we kick off the new year, I find myself reflecting on the ever-evolving landscape of UK farming. The challenges and opportunities facing our community have never been more profound. I am pleased to introduce the winter edition of our Agriculture and Farming newsletter.
I n the first article, our Head of Agriculture, Nick Banks, shares his insights on the past year and looks forward to what lies ahead. Nick’s expertise and vision provide a valuable perspective on the agricultural sector, offering guidance on how to navigate the uncertainties and seize the opportunities that 2024 will undoubtedly present. Next on our agenda is the “How to Thrive, Not Just Survive: Farming Conference,” scheduled for February. This event promises to be an invaluable resource for everyone in the farming community. It will bring together experts, farmers, and industry leaders to discuss the latest trends, share experiences, and explore innovative strategies for success. Find out more about the event on page 6.
On page 8, Daniel May, VAT Manager, delves into the intricate world of VAT agriculture and partial exemption. Understanding the nuances of VAT in farming can have a significant impact on your financial well-being, and Daniel’s article provides essential insights into optimising your tax situation. Finally, Graham Doubtfire, Private Client Tax Partner, explores the critical topic of succession planning for family farms. Securing your family farm’s future is not only a matter of financial security but also a matter of preserving the legacy you’ve worked so hard to build. Graham discusses how trusts can play a pivotal role in this process.
Jack Deal Business Advisory Partner
Please reach out to us with any questions, concerns, or topics you’d like to explore further.
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A time to reflect but also to look forward to the year ahead…
Nick Banks, Head of Agriculture at Scrutton Bland, takes time to reflect on the last few years and looks ahead to the coming year.
A s I write this article, we are in the midst of completing our clients tax returns for the tax year ending 5 April 2023. That tax year reports annual farm accounts ending between 6 April 2022 and 5 April 2023, a rollercoaster period highlighting the many challenges faced by farmers that manifest in the figures being reported. The invasion of Ukraine by Russia on 24 February 2022 was a catalyst for a number of those challenges. Farmers with a year end up to 30 June 2022 will be reporting results for the harvest year 2021. Profits in the main not exceptional but those who managed to hold over crops in store from that harvest and sell at post Ukraine prices achieved super profit on the back of a harvest with low input costs.
The harvest 2022 result for many was also very strong, with robust crop prices and inputs purchased before inflation took hold to drive up prices. Cost of fuel and wearing parts inflation led to higher harvest costs and that cost increase has seemingly endured. The figures we are reporting show those that scooped bumper profit of 2021 crop sold from store combined with a robust margin on the 2022 harvest are now filing some strong profits in the 2022/23 tax year. Those on the front foot have looked ahead and secured new machinery capital allowances to mitigate the uplift in taxable profit. Some invested in the fabric of the farm, such as land, new buildings or diversification such as holiday lets. Sound decisions at the time they were made but the challenge of increased interest rates is now to be faced if the investment was funded by debt.
Of course, in the same time frame Basic Payment Scheme subsidy has reduced but that reduction is masked by stronger margins. That reduction will be felt with less bountiful gross margin so it is important Sustainable Farming Incentive (SFI) and Countryside Stewardship options are explored. Tax relief by averaging over a two or five-year period can help smooth those profits and the team at Scrutton Bland are navigating some complex spreadsheets to optimise the tax position for clients. Of course, as we file these tax returns conversations with clients are now reflecting on the 2023 harvest result which was dogged by poor weather. Margins are expected to be squeezed with moderating crop prices but inflation driven growing costs. There may be good reason to reduce tax payments on account but planning is also needed for Basis Period reform, a topic we have covered in previous newsletters.
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The weather has also hampered establishment of the 2024 harvest. Torrential rain in the East of England has either held up winter crops being planted or washed away much that had been drilled. Spring cropping may now be the plan but of course seed costs have increased given demand. The outlook for 2024 harvest is a concern. The backdrop to all of this is the cost of finance. At 6 April 2022 Bank of England base rate was 0.75% and is currently 5.25% as the Monetary Policy Committee grapple with inflation. The era of ultra-low interest rates was likely to end and in my opinion, inflation was inevitable given the money pumped into the economy during the pandemic but few commentators predicted the stark escalation in interest rates that followed the disastrous Kwasi Kwarteng mini budget statement delivered on 23 September 2023.
Farmers with fixed rate debt are insulated but those with variable rates are experiencing a significant increase in debt servicing costs at a time when cashflow is starting to tighten as profits are unwound and some hefty tax bills may be falling due. November 2023 saw UK inflation fall to 3.9%. In April 2022 the rate was 9%, peaking in October 2022 at 11.1%. The recent announcement that the rate reduction is much bigger than expected has led to some commentators predicting that base rate could be reduced to 4% by the end of 2024. Whilst a reduction is welcome, debt servicing will still be significantly more for those on variable rate term debt or operating in overdraft. Strategic decisions may be needed, such as reviewing the term of debt or the sale of noncore assets to reduce debt and make operating cashflows more sustainable.
I do not anticipate major fiscal or legislative changes ahead of the General Election and the coming year will be dominated by political posturing of the main political parties. Consistency of policy and indeed voice of DEFRA whoever is in Government is important for both farmer and adviser to navigate what I am sure will be a year of further challenge. At Scrutton Bland we have a team of specialist advisers who understand the sector and are very well placed to support farmers manage their business. For more information please contact nick.banks@scruttonbland.co.uk, your usual contact or call 0330 058 6559 to find out more.
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How to thrive, not just survive: farming conference
“We are excited to be working with Fram Farmers and Suffolk Agricultural Association to host the Farming Conference 2024,” said Nick Banks, Head of Agriculture and Farming at Scrutton Bland. “This event is a unique opportunity for farmers to come together, meet and hear from industry experts, and engage in robust debate around how to thrive in the face of the opportunities and challenges confronting the sector.
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T he Farming Conference is a must-attend event for any farmer who is serious about thriving in today’s challenging environment. The conference offers a wealth of information and insights on the latest trends and best practices in finance, talent and training, and digital innovation.” The conference will begin at 9.20am with a welcome from Bill Baker, Suffolk Agricultural Association Chairman, shortly followed by the headline guest speaker, Henry Dimbleby MBE, the co-founder, and former CEO of Leon restaurants and lead on the Government commissioned review of the food system the National Food Strategy. We talk to Nick Banks, Andrew Knowles from Fram Farmers and Phillip Ainsworth from Suffolk Agricultural Association to find out more about the event. What is the theme of this year’s conference and why was it chosen? Andrew Knowles : The theme of the Farming Conference this year is “How to Thrive, Not Just Survive.” Farmers face several challenges which are well publicised, and we want the Farming Conference to inspire attendees to confront these head on see the opportunities that are also out there. Economic volatility, climate change, labour shortages and ever changing regulation forces farmers to consider how they use technology, how they attract and retain staff and how they structure and future proof their businesses. We have created this event to help farmers tackle these issues and position themselves to thrive.
Nick, you will be chairing the Finance section of the event, what can attendees expect to hear about? Nick Banks : Following Henry’s session, we will hear talks on farm funding issues with Grace O’Dwyer, Deputy Head of Agriculture at HSBC, Global Macroeconomics with Marc Otswald, Chief Economist and Global Strategist at ADM and a conversation with Paul Harris, my fellow partner at Scrutton Bland around what changes to the tax regime might mean to farmers in practice, under a Conservative, or a Labour Government. The session will be really interesting for attendees as we explore some of the financial challenges that farmers face and speculate on what the future may hold. They’ll be an opportunity for guests to ask questions and challenge our speakers views and we’re hopeful for a lively debate. Stephen Jacob from The Institute for Agriculture and Horticulture will be chairing the second section of the conference and will be discussing the importance of talent and training in the agricultural industry. What will be explored? Phillip Ainsworth : As part of the Talent and Training session guests will hear from Anthony Gardiner, Communications Director at G’s Fresh, as he talks about Labour Review, Tom Halton from Cheshire Dairy Farmers, who will be discussing the important topic of attracting and retaining staff. We’re also going to hear from Elizabeth Tree, a graduate from Harper Adams University. Elizabeth is not from a farming background but has chosen a career in agriculture, and will share valuable insight what the future work force of the sector is looking for in terms of their roles, career paths and incentivisation.
Belinda Clarke from Agri-Tech E will be chairing the third section of the conference where speakers will explore Digital Innovations and the future of farming in more detail. Can you tell us more about the discussions that will take place? Andrew Knowles : Dr Belinda Clarke is the Director of Agri-TechE, Europe’s largest commercial membership network connecting farmers and growers with researchers, technologists, entrepreneurs and investors and will be leading our Digital and Innovations session. Guest speakers for this session include James Forrest, who runs a large arable business and has had to grapple with how to turn the endless data in his business into useful management information. We’ll also hear from Kevin Gooding, from Diometer who provides solutions to challenges with handling data, and Andrew Williams from Home Farm Nacton who will share insights into how Home Farm have automated and brought robots onto the farm. How do those interested sign up to attend? Nick Banks : If you are interested in finding out more about the event or registering to attend the event at Trinity Park Ipswich, please visit www.eventbrite.co.uk/e/2024-farming- conference-tickets-680733360807 or call the Scrutton Bland Events team on 01473 945928 or email events@scruttonbland.co.uk. The event is free to attend and we have an amazing list of speakers who are coming along to share their knowledge and expertise – in short, it’s an opportunity to learn, grow, and network! Although the event is free to attend, we are kindly asking attendees to make a donation to YANA, a rural mental health support charity, to help support the fantastic work they are doing in and around the county.
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A business is considered partially exempt when it receives income which is taxable for VAT purposes (e.g. crop and livestock sales) and income which is exempt from VAT (e.g. residential property letting). The difference between zero-rated and exempt supplies should be noted. A zero-rated sale (e.g. foodstuffs fit for human consumption, land let for grazing etc.) is taxable which means associated input VAT can be recovered. Input VAT attributable to exempt supplies is not recoverable unless it falls within certain limits. In either case, no VAT is charged to the customer. Supplies subject to the 20% or 5% rate of VAT are also ‘taxable’. What must I do if I am partially exempt? The business must consider the impact of partial exemption on input VAT recovery each time it submits a VAT return and again at the end of the VAT year. Most VAT years in the agricultural sector run to the end of March as returns are generally submitted monthly.
VAT agriculture – partial exemption
Partial exemption is an issue for many farms, but one that is often overlooked, or dealt with incorrectly. Daniel May, VAT Manager explores the issue further and how farms can overcome this issue.
A partially exempt business’s input VAT is split into three ‘pots’ –
1. The first contains input VAT directly attributable to taxable supplies – this is likely to include VAT on goods such as seeds, fertilisers and sprays, and on services such as transport of goods and contracting 2. As you may expect, the next pot contains input VAT directly attributable to exempt supplies – this is likely to include goods and services incurred in maintaining and renovating rental properties, letting agent fees and commissions etc. 3. The final pot contains all residual input VAT which cannot be directly attributed to either taxable or exempt income – this is likely to include overhead input VAT on items such as office costs and accountancy fees
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Partial exemption - test your knowledge! I hope you’ve been paying attention thus-far! See if you can decide whether the farm below is de minimis on an annual basis.
As previously suggested, the taxable input tax is recoverable, the exempt input tax is not at this stage because we do not know the outcome of the de minimus test. Input VAT in the residual pot must be apportioned between taxable and exempt supplies.
Secondly, the total exempt input VAT must not be more than the total input VAT – i.e. there must be more input VAT attributed to taxable supplies than exempt. If both conditions are met, all input VAT is recoverable. A farming operation should watch out for significant repairs, improvements etc. to rental properties which may lead to more exempt input VAT than usual.
1. The farm has zero-rated crop sales of £1m and residential letting income of £200k
The standard method of input VAT apportionment
2. It incurs the following input VAT:
To apportion residual input VAT, a business may use the ‘standard method’ without HMRC agreement. This is usually sufficient for a farming business, but if it does not produce a fair and reasonable attribution of input VAT, the farm may apply to HMRC to use a Partial Exemption Special Method (a ‘PESM’) of their choosing. A PESM must be approved by HMRC before it is used. Under the special method a percentage of input VAT is attributed to taxable and exempt supplies. The percentage is calculated by taking the total taxable supplies made in the period and dividing this by the total taxable and exempt supplies. That percentage is then rounded up to the nearest whole number to leave the percentage of residual input VAT to be allocated to taxable supplies. For example, if £600,000 of taxable supplies are made and £100,000 of exempt, the recoverable percentage is 86% – i.e. 600,000 / (600,000 + 100,000) = 85.71% rounded up to 86%. The exempt proportion of the residual pot is added to the directly attributable to exempt. The sum of these two figures is the total exempt input VAT attributable to exempt supplies. If the total input VAT the business attributes to exempt supplies exceeds the de minimis limits, recovery will need to be restricted. What is the de minimis test? The de minimis rule is a threshold set by HMRC that allows small businesses to recover input tax linked to exempt supplies subject to certain limits. This can increase the amount of recoverable input tax for partially exempt businesses. There are two stages of the test. Firstly, total exempt input VAT must be within monetary limits explained below:
•
Producing crops, £2,000
Each year, a partially exempt business must perform an annual adjustment to look at its partial exemption position for the whole VAT year. If de minimis is not met on an annual basis, the irrecoverable portion of input VAT will need paying to HMRC. Similarly, if the farm has been restricting input VAT recovery in-year, it may be due a refund from HMRC. • •
Residential letting, £6,000
Residual, £5,000
Examples of typical taxable supplies in the agricultural sector:
•
The sale of crops, livestock, and other foodstuffs suitable for human consumption
Additional points – don’t skip these, there is some useful info here! A newly registered business can complete its VAT returns until the first annual adjustment on a ‘use-based’ method without agreement from HMRC. This is useful if taxable supplies won’t be made from the outset, but it is thought de minimis will be met at year end. • • • 1. If a business is de minimis in one VAT year, it can consider itself de minimis on each return during the next VAT year until it gets to the annual adjustment calculation. •
Letting of land and buildings which has been opted for tax
Land let for grazing
Facilities provided for the purpose of storing goods (this is often incorrectly treated as exempt)
Rights to fell timber or take fish
•
Contracting
2. While the annual adjustment is calculated to the end of the VAT year, any adjustment required can be deferred until the VAT return after the year end finishes – so, the April return for monthly filers. 3. Remember to consider opting to tax commercial buildings in order to recover input VAT on their construction/ refurbishment and avoid potential partial exemption issues. 4. Providing a person the right to store goods in a building is likely to be taxable at the 20% rate of VAT.
•
Animal feed
Examples of typical exempt supplies in the agricultural sector:
•
Residential property letting
• Other letting of land and buildings which has not been opted for tax
ANSWER TO TEST
The farm is not de minimis.
Standard method % = 84% (1m/1.2m, rounded up)
So, residual pot input VAT = £4,200 taxable and £800 exempt
Total Exempt Input VAT
No more than
Monthly
£625
Quarterly
£1,875
Total taxable = £6,200
Annually
£7,500
Total exempt = £6,800 Exempt is less than £7,500 but more than 50% of total input VAT
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Securing Your Family Farm’s Future: How Trusts Can Aid Succession Planning
Succession planning for family farms is a critical aspect of securing a legacy for future generations. Many farming families face the challenge of transitioning ownership to the next generation when there are uncertainties about individual involvement in continuing the family business. In such situations, a trust can play a vital role in safeguarding the farm and its assets The practicalities of using trusts for succession planning in farming families are explored by Graham Doubtfire, Private Client Tax Partner.
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Understanding the Basics of a Trust There are misconceptions that trusts can be complex and are often misunderstood and it is therefore helpful to explain some of the terms used. A trust is a legal arrangement that allows you to transfer assets to a separate entity (the trust) managed by a trustee, for the benefit of specific individuals or purposes. In the context of farming, a trust can be a valuable tool for preserving farmland and assets while providing for family members who may not be actively involved in farming. Protecting the Farm and Providing for Non- Farming Heirs Farming families often own vast tracts of land and valuable assets. When the next generation isn’t interested in farming, there’s a risk that these assets may be sold or divided, jeopardising the family’s legacy. In situations where some family members aren’t interested in farming, a trust allows you to allocate income and benefits from the farm to them without requiring their active involvement in the business. This can be a fair way to meet the financial needs of all heirs. By placing the farm and assets into a trust, you can therefore ensure they remain intact for future generations. Choosing the Right Trust Structure There are various types of trusts to consider, including discretionary trusts and life interest trusts. Each has its unique features and tax treatment, and the choice depends on your family’s specific needs and goals. Appointing a Trustee and Setting Clear Guidelines Selecting a trustworthy and knowledgeable trustee is crucial. This person or entity will manage the trust according to the terms you set, ensuring that assets are protected and benefits are distributed as intended. When creating a trust, it’s essential to establish clear guidelines regarding how the farm will be managed, how income will be distributed, and under what conditions beneficiaries can access their shares. Legal and financial advice is invaluable in this process.
Tax Implications Understanding the tax implications of using a trust for succession planning is vital. Proper planning can help minimise the tax burden on the farm and its heirs. Inheritance Tax and Capital Gains Tax are key considerations and the use of a trust may enable these reliefs to be captured earlier than on the second death of a married couple which is often when the transfer otherwise takes place. With uncertainty surrounding government and the future direction of capital taxes these concerns could be removed with the use of a trust. Regular Reviews and Open Communication Succession planning is an ongoing process. It’s essential to periodically review and update the trust’s terms as family dynamics change or if the farm’s financial situation evolves. Maintaining open communication within the family is critical. Discussing the trust and its implications with all family members, even those not directly involved in farming, can help avoid misunderstandings and disputes and to allow all members of the family to understand their legacy and achieve a sense of fairness. Using a trust for succession planning in a farming family is a practical and effective way to ensure the continued success of your farm and the fair distribution of assets among heirs. While it may seem complex, with the right guidance, it can be a valuable tool for preserving your family’s farming legacy. Succession planning can be emotionally charged, but it is essential for securing the future of your farming business. By implementing a trust, you can navigate the challenges and complexities with a clear plan, safeguarding your family’s agricultural heritage for generations to come. If you need assistance with succession planning for your farm, please reach out to your usual Scrutton Bland contact, or reach out to Graham Doubtfire by calling 0330 058 6559 or emailing hello@ scruttonbland.co.uk. We are here to help you make informed decisions for your family’s future.
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Meet the Team We have a long-standing association with the agriculture sector and our specialists have a thorough understanding of the opportunities and challenges facing the industry.
We seek to build long-term, trusted relationships with our clients. It is important to us that we understand our clients’ business and personal aims and objectives, in order that we can provide bespoke and personal advice.
Get in touch with a member of the team to see how they can help you.
Nick Banks Business Advisory and Cloud Accounting Partner nick.banks @scruttonbland.co.uk 01473 945762 James Tucker Business Advisory and Cloud Accounting Partner james.tucker @scruttonbland.co.uk 01473 945761 Jason Fayers Managing Partner and Tax Partner jason.fayers @scruttonbland.co.uk 01473 945817 Graham Doubtfire Private Client Tax Partner graham.doubtfire @scruttonbland.co.uk 01206 417267 Simon Hurren Private Client Tax Associate Partner simon.hurren @scruttonbland.co.uk 01473 945822
Jack Deal Business Advisory Partner jack.deal @scruttonbland.co.uk 01473 945786 Chris George Tax Advisory Partner chris.george @scruttonbland.co.uk 01473 945836 Ryan Pearcy SB Digital Associate Partner ryan.pearcy@ scruttonbland.co.uk 01206 417218 Jo Gilbert Client Manager jo.gilbert @scruttonbland.co.uk 01473 945765
Janice Bush Client Manager janice.bush @scruttonbland.co.uk 01206 417209 Sonja Lambourne Client Manager sonja.lambourne @scrutttonbland.co.uk 01473 945768 Emily Pinner Client Manager emily.pinner@ scruttonbland.co.uk 01473 945770 Clare Thorpe Senior Client Support clare.thorpe@ scruttonbland.co.uk 01473 945772
0330 058 6559 scruttonbland.co.uk
@scruttonbland
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