Rural Business. Newsletter. Winter 2013

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1 Newsletter Winter 2013 Rural Business Christmas is a time for reflection on the past year and for looking forward to the forthcoming year, but how will farmers look back on 2013 and what will 2014 bring? There was very little optimism in the industry at the start of this year, following the wettest of years in 2012 with the poor harvest and difficult planting season that followed. Surely things could only get better, but alas they did not, and moods were not improved by what seemed to be a long and cold winter and the high feed bills that followed as forage ran short. However, a bit of sunshine made the world look a better place. The sun began to shine, the crops began to grow and even the milk price went up! The 2013 harvest in general was much better than people had feared, and overall the mood across the farming industry as we look forward to 2014 is more upbeat than this time last year. No doubt next year will bring its trials and tribulations and we are sure - as farmers - you would expect no less! But remember that we, and other professionals, are here to help. Hopefully this edition of Rural Business will contain something of interest to everyone, and all at Francis Clark wish you a Merry Christmas and as always, a prosperous 2014 (but perhaps without too much going to the taxman!).

2 Partnership agreements and wills go hand-in-hand Partnerships are the most common business structure for farming businesses. However family farming partnerships often do not have formal partnership agreements. This is fine whilst the family get on, but trouble can arise when one partner leaves or dies or the family has conflicts. Farming businesses are reliant on the use of valuable property and when families fall out the use of that property is put at risk. Where there is no formal partnership agreement this can become very costly in legal fees, with solicitors having to rely on historical evidence and a 123 year old act (The Partnership Act 1890). Where the farm property is shown on the balance sheet of the accounts, if there is no formal agreement in place and a dispute arises between the partners, the Partnership Act may force the assets to be split equally between the partners. This may happen even where an asset has always been understood to be owned by one party, or one party is shown as the owner on the deeds or at the Land Registry. It has been common practice to bring farm property onto the partnership balance sheet to help maximise inheritance tax reliefs. However, care must be taken to ensure that all partners agree to this and agree how the property should be dealt with if one of the partners leaves or dies. A well worded partnership agreement and attention to the layout of the accounts is important to ensure they reflect what is intended by the partners. In addition, on their death, a partner may intend to leave certain farm property to their children (for example they may wish to leave land to one child with a cottage passing to another). However, if the cottage and land is now partnership property they need to ensure their will and partnership agreement can deal effectively with this. If the will leaves their partnership share to one child and the cottage to another, it could in fact end up that the first child inherits everything including the cottage - as it is part of the partnership capital, with the second child receiving nothing.

3 Abolition of the Agricultural Wages Board The abolition of the Agricultural Wages Board (AWB) has a number of effects, one of which is the ability for employers to renegotiate existing farm workers contracts of employment, and to introduce more flexible pay rise arrangements. For new employees the previous requirements under the AWB no longer apply and they are simply subject to the National Minimum Wage and standard holiday and sick pay entitlements unless otherwise agreed. However, for all employees the introduction of auto-enrolment into a workplace pension scheme means that some changes to employment arrangements are likely to be needed, and there may be advantages in offering an early pension enrolment in return for other changes to existing employment contracts. Autoenrolment is being phased in over the next few years and it s important that the planning process is started early to have the greatest chance of being fully ready by your staging date. Autoenrolment is not just about setting up a pension scheme; there is also a lot of administration required to comply with the new rules. Please contact us if you require advice or assistance with this, particularly as the end of the AWB provides an ideal opportunity to wrap up all of these changes together. Improvement or repair? The question of whether expenditure is revenue ( repair ) or capital ( improvement ) in nature is probably one of the longest running arguments in the UK tax system. The recent case of G Pratt and Sons v HMRC questioned whether expenses - particularly those of resurfacing - are tax deductible as a repair. The position has been looked at once again in another case - that of Cairnsmill Caravan Park v HMRC - concerning the replacement of the grass surface of a caravan park with a hard-core surface, where it was agreed by the First-tier Tribunal (FTT) that the cost of the hard-core surface was correctly treated as revenue expenditure. This is a potentially surprising decision and a case that HMRC might have been expected to win. The salient points from the decision by the FTT are as follows: The size of the entirety The tribunal identified the entirety of the subject that had been repaired as the whole caravan park. Having established this, it was noted that the area of the park which had been resurfaced extended to only 3 acres out of a total of 51 acres. Durability and maintenance costs HMRC had argued that the hard-core surface is more durable than grass and was therefore an improvement. However, as the evidence emerged other considerations arose and the FTT questioned HMRC s assertion, as the original grass surface had been in existence for about 50 years. Maintenance costs of the new hardcore surface are (if anything) marginally higher, the hard-core has less aesthetic appeal and is less practical (it is not suitable as a recreational area for children) and it is difficult to fix a typical camping awning on to a hard surface which had generated customer complaints. This highlights the importance of really understanding what work has been undertaken and having evidence to support the decision taken as to the accounting treatment. For example, if valuations undertaken before and after the work has been completed show no demonstrable increase in value this suggests a lack of improvement.

4 Timing is crucial to maximise proceeds on property sales With land prices continuing to increase and invigorated demand for housing, the capital gains on property sales are often substantial. In many cases land has been owned since before 1982 when land values were a fraction of the price per acre received for development land today. Capital gains tax is chargeable on the profit made on property sales, however, for those that farm their land entrepreneurs relief (ER) is a very valuable relief that can reduce the rate of tax on qualifying business disposals from 28% to 10%. The ER legislation is complicated and it requires some thought and planning before any contracts are signed. Individuals who are intending to sell property need to structure their businesses and ownership of assets in preparation for the sale to ensure that the relief is maximised. By way of example, consider Mr Jones who has been approached to sell some land for housing. The sale proceeds amount to 450k and Mr Jones wishes to continue farming his remaining land. With no tax planning ER would not be available and CGT of 125k would be payable. However, by changing the structure of his business going forward he would be able to claim ER and reduce his CGT bill to 45k, a saving of 80k! To qualify for ER you need to either cease - or sell - your farming business at the same time as (or before) you sell the property giving rise to the capital gain. However, where only part of the property is being sold it is likely that farming is to continue and without planning the ER rules would not be met. Where land is to be sold for development, a claim for ER may be complicated by the wording of sales agreements or the use of land collaboration agreements. Therefore it is important that advice is taken very early on - and certainly before contracts are signed - if you wish to maximise the net of tax proceeds.

5 Episode One - Meet The Farmers! We first met The Farmers at an Inheritance Tax seminar held by Francis Clark. Their accounts and tax returns were previously prepared by a one-man-band who had acted for Sid for the last 35 years. However, they received little advice or tax planning and experienced a very slow turnaround of their accounts. The family decided to look for another accountant and moved to Francis Clark. At our initial meeting we found out the following details about the family: Dingley Dell Farm at Hogsnorton is run in equal partnership by brothers Richard (50) and John (47) with their father Sidney (73) and their mother Eileen (70). They milk 200 dairy cows, with 70 followers and a 100 sheep flock, on 450 acres of which 375 acres are owned and 75 acres are rented. Richard is married to Caroline (45) who does the books, works on the farm and looks after the house. They have three children, Joe (17), Rosie (15) and Archie (10) who is farming mad (pictured above)! John is still single and hasn t really left his Young Farmers days behind him! Sid and Eileen also have a daughter, Angela (45) who is not in the family business. The farm consists of: Asset Market Owned by Occupied Value by 200 Acres 1,000,000 Sid Partnership (Inherited from his father) 4 Bedroom Farmhouse 590,000 Sid Richard (Inherited from his father) and Caroline 3 Bedroom Bungalow 275,000 Partnership Sid and Eileen 3 Bedroom Cottage 265,000 Sid John (Inherited from his father) Farm Buildings, etc 250,000 Sid Partnership (Inherited from his father) 175 Acres 1,050,000 Partnership Partnership Dingley Dell Farm 3,430,000 The farm has debts of 950,000 (from purchasing the land) and 150,000 (from building the bungalow). The farm has a year end of 31 March and made a profit of 40,000 in 2011 and 70,000 in Whilst The Farmers are a fictional family, on a fictional farm in a fictional village, the obstacles and situations they come across, and the decisions they face, are based on real life business and tax issues we, at Francis Clark, see all too often. Keep up with The Farmers by watching out for them in our future newsletters to see which dilemmas ring true for you and your family.

6 VAT on farmhouse related expenditure HMRC s policy for many years has been to allow a proportion of input tax to be claimed on farmhouse related expenditure. It is accepted that the farmhouse is an integral part of the farming business and as such - providing that the building is a typical working farmhouse, the business is a full time farming activity, and the work done is in the nature of general repair and maintenance of the farmhouse - up to 70% of the VAT incurred may be recovered. In other cases, such as where farming is only a part-time activity and the farmhouse is primarily the family home (or where the work done is an extension or alteration of the farmhouse) HMRC s policy is to consider each case on its merits. Up to now, where the farmhouse is owned by a farming company, the 70% policy has not applied and claims have been limited to the proportion of the use of the farmhouse that is shown to be used for the company s business, Please visit our website for your local office expert Francis Clark has seven offices in the South West: FRANCISCLARK.CO.UK If you would like to be added to, or deleted from our mailing list, please contact Martin Anderson martin.anderson@francisclark.co.uk or sign up online at: Exeter Plymouth Salisbury Taunton Tavistock Torquay Truro rather than for accommodating its officers. However, recent European Court litigation suggests that in the future, farming companies will be entitled to the same basis of input tax recovery as other farming entities. Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered number OC The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for inspection and at The term Partner is used to refer to a member of Francis Clark LLP or to an employee or consultant with equivalent standing and qualification. This publication is produced by Francis Clark LLP for general information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of publication), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.