AGRI Business
scruttonbland.co.uk
The future of farming – harnessing data for better control
The impact of this crisis has prompted all of us to shift our perspective on our daily life, adapt our routines and appreciate the safety and fragility of the communities in which we live.
COVID-19 Impact on farming and rural enterprises
A national spirit has emerged to get through this together. To support, collaborate and help at a time of great need and vulnerability.
For the first time since the Second World War, scarcity of food was a reality – the anxiety this caused manifested in the ugly behaviour of stock piling and profiteering by a greedy few.
Inevitably there has been a focus on food security and supply, production and supply chain, distribution and resale.
Food production starts with the grower and farmers and farm workers were classified as key workers.
The crisis has reconnected the public with the countryside – as a safe haven for exercise and maintaining wellbeing for those who can access it but even for those who do not live in rural communities the connection between the food they need and where it comes from has never been clearer. The crisis has therefore put into focus the two key issues which are the thread of the policy and progress update on “Farming for the Future” published in February 2020 which at the time of writing seems more than a few months ago, given all that has happened since. The Agricultural Bill seeks to incentivise farmers to improve productivity at the same time as protecting the natural environment. This shift of focus to protect the natural environment to make food production more sustainable has never more relevant. The crisis has required all businesses to adapt. The impact of lockdown has prevented some from trading and others to adapt how they operate with a national migration of the work force from offices to their homes. Farm enterprises for a number of years have diversified to make their business more resilient and create income and profit streams to complement the core activity of farming. In this crisis some of those activities, such as holiday lettings, outdoor activity centres and retail operations, have stopped. Government support such as the Job Retention Scheme and business grant funds have helped businesses to mothball such operations during the lockdown but it highlights that if the return on the largest asset employed in the business could be enhanced then the business fundamentally will be better positioned to withstand future crises. Now is a time therefore to pause and reflect on how a farm business strategy can make the most of the proposed reforms. Of course, lobbyists will challenge DEFRA that the current proposals may still not be fit for purpose and the current crisis may bolster the argument, but those two threads of enhancing productivity and protecting natural environment will remain.
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As things stand, from 2021 direct payments are set to reduce by the following percentages.
Environmental Land Management Scheme (ELM)
This crisis has put an emphasis on the importance of our natural environment – it therefore fits that custodians of the land should be incentivised to protect, maintain and improve it. The proposals set out three tiers each with different objectives and not all tiers will be attractive to all farmers. The scheme will a have focus on outcomes specific to local needs. For larger schemes in specific areas, tenders may be required to secure the funding. Working with your advisers to form a strategic plan now, to identify where projects can be delivered to benefit the farm or estate’s natural environment for the long term will mean that you will be in pole position to secure funding and have a competitive edge in any bidding process.
Direct payment band
Reduction percentage
Up to £30,000
5%
£30,000 - £50,000
10%
£50,000 - £150,000
20%
£150,000 or more
25%
Farmers need to be alert to the reduction in income and consider the impact on cashflow and profitability.
The reforms propose, possibly from 2022, to delink direct payments from the land for all farmers. Payments will be made based on a reference period. This will mean that land and entitlements will not be required to secure the payment and the payment can be used as the farmer sees fit without restriction. Identifying strategies that can maximise opportunity within the framework of ELMs and seeking ways to innovate to unlock grants may enable some to replace the reduction in direct payments. An option under the transition period is to take a lump sum in lieu of future entitlement to direct payments. The basis of calculating that lump sum is to be confirmed, but this might be an appealing option to some. That lump sum could be invested or used to reduce debt for example, therefore reducing the burden of servicing debt on future profit without the subsidy payment. Careful consideration will be needed for the financial implications of taking a lump sum. The progress paper states that the tax treatment of lump sums and delinked payments will be considered in due course. Subsidy at the moment is taxable as part of the business profits – a lump sum may be subject to Capital Gains Tax but it will be a pleasant surprise if any lump sum or other form of delinked payment in the transition period is exempt from tax.
Supporting a prosperous and productive sector
The policy and progress update is clear that from 2021 funding schemes will be available to those farmers who wish to innovate and add value to their products, create new products or sell produce directly to their customers. As a commodity producer, farmers will be price takers on global markets but if a commodity can be processed to a food product and sold directly then the farmer is a price maker, often enjoying a premium for quality and provenance. The exhaustion of supermarket distribution capacity in the crisis has led consumers to look at smaller independent retailers and box deliveries. The situation with flour is a good example where it was not the availability of product that was the issue. The problem was the distribution channel not being able to cope with the demand from home bakers for smaller packs of flour since the industry was positioned to supply in bulk packs for the bakery and catering trade. Should a farm innovate then it could qualify for attractive tax reliefs available for research and development. These will help reduce the tax burden of the business and, following this crisis, it is inevitable that the tax burden of business will have to increase to reduce the debt that the Government have created in providing support during the crisis.
Looking forward
As we come through the immediate challenges of the COVID-19 crisis it is important that we reflect on how the crisis may change the way a business operates and how it will have changed consumer behaviour. It is more important than ever to take time to self-evaluate and devise a strategy for your farm and estate to maximise opportunity presented by policy reform and the new normal left in the wake of COVID-19. The progress paper comments on the role of the adviser and that for advice to be effective it must be “trusted, consistent, credible and cost effective”. At Scrutton Bland we have a specialist team of advisers to our farming clients. We place much emphasis on a collaborative approach with other trusted advisers to help our clients have the best chance of meeting the challenges but maximising the opportunities as policy reform unfolds and the world returns to a state of normal after the pandemic.
Payment reforms
At the nub of the reform is the known reduction to direct payments and it has been well reported how much of a farm business’ profit is represented by subsidy.
There are transitional arrangements for Countryside Stewardship Schemes to be replaced by ELMs.
Farm subsidy payments are to be phased out over a seven-year period from 2021 to 2027. It is not known if that timetable will change following the crisis. The Tenant Farmers Association has led calls for a “further period of reflection”.
To get in touch with a member of our agricultural team please email hello@scruttonbland.co.uk or call 0330 058 6559 .
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Digging into Data As businesses are becoming increasingly reliant on up-to-date and accurate data, navigating through the maze of software and online options available is becoming a time-consuming job. B oth businesses and private individuals are seeing their finances increasingly managed via cloud based applications, so it is an inevitability that the agricultural industry will need to follow. Understanding what software is available and which versions are needed is becoming a painstaking task for many agricultural business owners according to Ryan Pearcy, Business Advisory Director at Scrutton Bland. There are currently thousands of cloud-based applications available, which is a lot for a business owner or financial director to have to wade through on their own! By using the services of a cloud software expert, you will save a huge amount of time and money and have the peace of mind in knowing that the system you have chosen is the best fit for your business and is compliant.
We listened to the feedback from our clients and the overwhelming message was that whilst many of them wanted to engage more with digital technology, they just didn’t have enough hours in the day. Our answer to this was to introduce a new type of advisory service. Our Systems Advisory Service helps clients work out which software packages they need based on data they need to gather and report on and any other software packages they need to interface with. The service works by an adviser sitting down with you to review the systems that you currently operate. From this the team can produce a data map, which shows you how your data currently flows between all the systems you use. This enables us to provide you with an independent evaluation of where your systems can be improved and to suggest the software and in particular any add-on apps that can help you do this. The second stage is the conversion process to install the new software and to assist businesses in transitioning their data to the cloud. We know from experience that it is the first three months after a new software system is in place that is the most crucial to ensuring that the business can operate with minimal distribution so we work alongside our clients to assist and advise them should they need support. We know from speaking to our clients that some agricultural business don’t think this kind of thing is relevant to them, but farming and agri business is actually at the forefront of technical development, particularly around finding ways to be more efficient and produce accurate reports. I’d suggest any operation with a turnover between £500k and £20 million should be looking for professional advice, although smaller businesses may well also benefit. If you are unsure where to start with your digital journey, or maybe are already managing your data in the cloud but would like to find our more about the apps available you can contact our advisory team on 0330 058 6559 or email hello@scruttonbland.co.uk to find out more.
The farming sector has had to adopt new ways of gathering and analysing data over the past few years, not just with regard to equipment but in crop and stock management too, and we know from working closely with our clients that many are seeing the benefits of using digital technology when managing their business accounts. The problem is however that so many farmers are just too busy, or not properly informed about the other tools which are available to them. One of the most common questions I hear from clients is ‘Where do I even start?’. With a range for software options available and all at different prices, getting it wrong can lead to costly mistakes. But, in reality the transition from the traditional paper based or desktop business processes can be easier than you’d think. Most of us are already using a wide range of apps and cloud-based software in our personal lives without even thinking twice about it, from online banking to social media we are all managing cloud-based data already. As I said, many agricultural businesses have already adopted accounting systems and are starting to see the benefits of having live data, accessible 24/7. From an accountant’s point of view, having access to live data can help us to better manage our clients finances and gives us a better oversight to be able to recommend future actions. For clients themselves, there are some very immediate benefits from being able to send invoices out and getting paid faster, through to being able to prepare accurate reports in order to support applications for lending. Where we see next big development will be is the add-on style apps which can integrate into packages such as Xero and which are tailored to specific sectors or business types. Most software now operates with an open application programming interface (API). This isn’t as scary as it sounds, in short, APIs allow software developers to write programmes which allow other pieces of software or apps to talk to each other. APIs have been in use for some time now in cloud accounting packages and so the logical next step is for software developers to start creating apps which are tailored for specific business sectors, but which will all feed back into one data source.
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There are a range of apps available which have been developed specifically to help businesses operating in the Agricultural sector and which can help manage not only accounts but all areas of a business’ finances. You should always consult with an expert adviser before committing to any new business app, to ensure that you have the right one for you - but here’s how some of the hottest apps on the market stack up:
Xero is quickly becoming one of the most popular cloud based business finance solutions – globally. It is perfect for agri businesses as it can seamlessly integrate with agri specific apps which provide farmers with better oversight of livestock quantity and value. Allows you to create and send personalised online quotes on the spot from wherever you are. Sync Xero with third-party agriculture apps for crop and livestock tracking and more. Collaborate on business information in real time with your accountant or bookkeeper.
Figured is a complete online livestock crop and production tracking,farm budgeting and forecasting tool that gives you accurate data in one place, in real time.
Keep on top of your expenses with one tap. Just photograph your receipts and Receipt Bank will extract the data and post in directly into your accounts.
Muddy Boots gives agri businesses the power to measure and monitor quality and compliance throughout their supply network. Through collaborative online software, customers get immediate visibility of the performance of their sites, suppliers and products.
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The Power of the Partnership
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Whilst the current unprecedented circumstances create anxiety and uncertainty, they also present us with time. Time to spend with our close family but also time to think, time to plan and time to get around to those tasks that always end up at the bottom of a to-do list.
For many individuals, Inheritance Tax (IHT) is one of those subjects which is always put off until another day. While it can be a difficult subject to discuss, after all none of us likes to consider our own mortality, leaving the next generation with a hefty tax bill can be equally as difficult. With IHT being charged at a rate of 40% of the value of your assets, an unexpected tax bill can leave many people with no choice but to have to consider selling inherited assets to settle the liability. This is especially true in agricultural businesses. Many farmers believe that as their land and buildings are all ‘farming assets’ then there is automatically no IHT due. However, this is very rarely the case, especially if there is any development potential. However, with some tax planning, significant liabilities can be prevented enabling agricultural businesses to continue successfully for future generations. Below are some key areas that farming businesses should be looking at in order to ensure they are taking advantage of the maximum amount of Agricultural Property Relief (APR) and Business Property Relief (BPR). Review the Partnership Accounts When looking at a set of accounts, usually most business owners are primarily concerned about the profit and loss account, looking to see how well the business has done in the year. However, it is equally, if not more important to look at the balance sheet. Partners should check that all farming assets, including land and property are accurately recorded on the balance sheet. This should also include any cottages or rental properties that are on or around the farm. If land and property used in the business is not currently included in the accounts, tax and legal advice should be sought. Valuable IHT reliefs such as APR and BPR can be gained by bringing assets into the balance sheet; however, each case will need to be judged on its own facts. Adding land and property into a partnership balance sheet also needs to be done in the correct way and will require a formal deed to be drawn up. Once it has been established that land and property is within a partnership balance sheet, it is important to review how the ownership of the assets are shown within the accounts. Each partner will have a ‘current account’ in the business showing their share of the profits as well as drawings taken. There may also be partner capital accounts showing capital contributions into the business to fund partnership buildings and machinery. However, land and property should be recorded in separate, land capital accounts. These will clearly show the ownership of each parcel of land and each property between the partners.
One key point to look out for in partnership agreements for agricultural businesses is a clause stating that on the death of a partner, the remaining partners are required to purchase the interest of the deceased. Whilst this clause can be beneficial in ensuring that the partnership assets remain in place and the business can continue to trade following the death of a partner, it creates a binding contract for sale and means that no amount of APR or BPR are available on the partnership interest. There are potentially other ways of achieving the benefits of this clause without scuppering the availability of valuable tax reliefs. Watch out for ‘Hope’ The primary IHT relief available for individuals in the farming sector is Agricultural Property Relief (APR). This relief is valuable; however, it only covers the ‘agricultural value’. With the increasing need for new houses and permitted development rights, many agricultural assets also have an intrinsic ‘hope value’ over and above the agricultural value. This additional amount does not benefit from APR and could be subject to a 40% IHT liability. However, with some careful planning, this can be prevented. Look out for ‘Character’ Another asset with potential exposure to an IHT liability is a farmhouse. With most agricultural businesses now consisting of more than one generation farming together, farming partnerships can now have two or even three different properties that could be classified as farmhouses. APR is only available on farmhouses which are owned and occupied alongside farmland. HMRC also only allow APR where the farmhouse is ‘character appropriate’ in relation to the surrounding land. This takes into account the size and location of the house in comparison to the size of the occupied land, the history of the property as well as the current use. It is therefore important to establish and document where farming decisions are made through the use of minutes of meetings and location of the farm office. One common problem can be where the historical ‘main’ farmhouse is still occupied by the eldest generation who perhaps no longer take as active a role in the management of the farm as they once did. Unless there is evidence to demonstrate that farming decisions are made in the property, any claim for APR could be denied causing a significant IHT bill. What can be certain is that at the end of this pandemic, the government will have much larger borrowing and there is very likely to be a recession. This means that there will be a need for increased tax take by the Treasury. As well as raising the headline rate of some taxes, there will no doubt also be restrictions on some reliefs. A review of the effectiveness of Inheritance Tax was carried out by the Office for Tax Simplification and its second report was published in July 2019. The cost of APR and BPR was already under the spotlight and changes have been suggested even before the current need to raise tax revenues. It therefore seems likely that there will be some tightening of the rules for APR and BPR in the near future. Consequently, it is now the perfect time to review the IHT position of your agricultural business.
The Importance of Having an Up to Date Partnership Agreement
Alongside looking at the partnership accounts, it is vital to consider the partnership agreement, as well as setting out how income profits are to be split, there also needs to be mention of how capital profits are allocated between the partners. Whilst the existence of an up to date, well drafted partnership agreement is extremely helpful for tax planning reasons, it also provides many other benefits to a family business. Without a partnership agreement, the business is governed by The Partnership Act of 1890 and I cannot believe that any business will want to be regulated by a piece of legislation written 130 years ago.
Scrutton Bland can offer a range of specialist advice for agricultural clients including tax, insurance, business development, digital accounting and succession planning. For more information please email hello@scruttonbland.co.uk or call 0330 058 6559.
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Meet our Agricultural Team
Nick Banks Business Advisory Partner
Jason Fayers Tax Partner
Graham Doubtfire Private Client Tax Partner
James Tucker Business Advisory Partner
Gavin Birchall Tax Partner
Ed Nottingham Insurance Director
Jo Gilbert Business Advisory Manager
Jenny Binder
Sonja Lambourne Business Advisory Assistant Manager
Chris George Tax Manager
Janice Bush Business Advisory Manager
Business Advisory Assistant Manager
0330 058 6559 scruttonbland.co.uk
@scruttonbland
Scrutton Bland Financial Services Ltd is authorised and regulated by the Financial Conduct Authority. 0551/06/2020/MKTG
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