TIME TO FUTURE-PROOF YOUR BUSINESS BEFORE THE TAXMAN POUNCES

There has been a rare beacon of good news on the tax front, with HMRC sneaking out an announcement on their website (there being no autumn Budget statement this year) that the temporary increase in the Annual Investment Allowance, introduced by then Chancellor Philip Hammond in 2018 and due to come to an end on 31 December 2020, would be extended for another year.

This means that agricultural businesses will be able to secure full tax relief on qualifying capital purchases of up to £1 million in the trading year in which the investment is made – a significant cashflow benefit.

Make the most of this unusual generosity from ‘Uncle Rishi’ though, because his reputation for doling out largesse can’t last forever.  It won’t be long before the massive Covid bills will have to be paid, and like all politicians, the Chancellor will be looking first for low-hanging fruit, raising taxes where the fewest possible people – or more accurately voters – will be upset.

Sadly, government tends to view farming as falling into this category, and the sector is set to suffer more than its fair share of fiscal pain over the coming years.

With the Conservative manifesto promising not to increase income tax, VAT or national insurance during the lifetime of this Parliament, it is inevitable that taxes such as inheritance tax and capital gains tax will be in the firing line for swingeing increases.  And given the disproportionate number of family businesses in agriculture, there has never been a more important time for farmers to ensure their businesses are structured robustly for tax purposes.

Currently Business Property Relief applies to concerns where 50 per cent of income comes from trading activity, rather than investment.  The government’s Office of Tax Simplification (OTS) is making noises that this proportion should be raised to 80 per cent, which will have a significant impact on farm businesses which have diversified into things like holiday lets, business units and the like.

Farm businesses which have tenancies under the Agricultural Holdings Act (generally speaking, those entered into before 1995) could also be caught in this tax trap.

It has been widely reported that the OTS is calling for capital gains tax rates to be brought into line with income tax rates, which in some cases would see a doubling of the tax due.  It is also likely to recommend that ‘double relief’ (for example through inheritance tax and capital gains tax) will no longer be available.

It could be argued that it’s right that we should all pay our share of the cost of the pandemic, given that we are supposed to be ‘all in it together’.  But farming is a soft target for the taxman, and it’s vital that agricultural businesses ensure that they are structured in such a way as to be tax efficient as they can be. 

Easy wins such as ‘Surrender and Regrant’ are not about avoiding paying tax; they are about making sure that farm businesses are not taxed out of existence.  Such moves could be outlawed in coming years, so future-proofing your farm business from a tax point of view should be a priority right now.