Farming Update issue 23 autumn/winter 18 LANDLORD FARMERS CHANGES TO INCOME TAX RELIEF +OWNERSHIP OF FARM PROPERTY MAKING TAX DIGITAL FLAT RATE VAT SCHEME COMMERCIAL SHOOTS AVERAGING Chartered Accountants Business Advisers Tax Consultants
FARMERS MAKE ROOM FOR THE LET PROPERTY CHANGES Many farmers are landlords, whether it be on a tenanted farm with various let cottages or following investment after very productive years. From 6 April 2017 new rules were introduced to restrict the amount of income tax relief landlords can get on residential property finance costs to the basic rate of tax. What are property finance costs? Mortgage interest Overdrafts Loans to buy furnishings Incidental costs of obtaining finance, such as fees and commissions Legal expenses for negotiating/drafting loan agreements or valuation fees required to provide security for a loan Who is impacted? These rules only apply to UK individuals or partnerships who own residential property in the UK or overseas. Farmers who are landlords of commercial properties or furnished holiday lettings are not affected. The changes are being phased in over 4 years from April 2017 as follows: Tax Year % of finance costs deductible from rental income % of basic rate tax reduction 2017/2018 75% 25% 2018/2019 50% 50% 2019/2020 25% 75% 2020/2021 0% 100% 2 autumn/winter 2018/19 issue 23
Calculations From 2020/2021, property profits will be calculated without considering the deduction of finance costs and a tax deduction will be given at 20%. For example (using a basic rate tax payer), under the old rules rental income of 15,000 with finance costs of 5,000 resulted in a taxable profit of 10,000 and a tax bill of 2,000. Under the new rules, this taxable profit will be 15,000 with a tax bill of 3,000 and a tax deduction of potentially 1,000 ( 5,000 at 20%) from your overall tax bill. Restrictions The new rules also affect brought forward property losses; these must now be set against property profits which can mean that the taxable profit could be less than the finance costs. A restriction arises which limits the deduction to 20% of taxable profits. When finance costs are greater than the property profit; any excess does not reduce the tax payable on any other sources of income. If total income is low (excluding savings and dividend income) so that rental profits fall within the personal allowance, the deduction is restricted to 20% of the profits that are actually taxable. Where there is a restriction, any finance costs which have not been used to calculate the basic rate deduction in one year can be carried forward and added to the finance costs of the following year. Surprise tax bills Basic rate taxpayers are largely unaffected, but some could find they have more tax to pay under the new rules e.g. farmers close to, but previously below the next tax rate threshold. Many farmers have fluctuating income and can benefit from farmers averaging for their trading profits and this can make tax planning for rental income difficult. Farmers could also see their entitlement to tax credits and child benefit reduced or eliminated if their taxable income breaches those thresholds. Sources of finance Ways of financing a buy-to-let need to be considered at the outset. Stamp Duty Land Tax (SDLT) 3% Surcharge Farmers should not forget the additional 3% surcharge for SDLT on the acquisition of buyto let and/or second home properties where, following a purchase, a farmer owns two or more residential properties and is not replacing the main residence. The residential SDLT rate of 2% for the 125K-250K band therefore becomes 5% for the purchase and so on for other existing rates. For example, if a farmer purchased a second residential property as a buy-to-let investment for 200,000, the SDLT payable is now 7,500. Under the old rules, this SDLT would have been 1,500 an increase in SDLT of 400%! The key for farmers is mitigating their exposure to these changes by taking advice at their earliest opportunity. autumn/winter 2018/19 issue 23 3
FLAT RATE VAT SCHEME The Flat Rate scheme was introduced to cut red tape for tax payers. It is more likely to be of interest to farm diversification businesses than those supplying zero rated farm products. To join the scheme your VAT turnover must be 150,000 or less (excluding VAT). The rates are 11% for agricultural services such as contracting, 6.5% for farming or agriculture not listed elsewhere and 10.5% for forestry and fishing. Don t forget you get a 1% discount if you are in your first year as a VAT registered business. You keep the difference between the VAT you charge your customers and what you pay to HMRC. For example, you bill a customer 1,000 adding VAT at 20% to make 1,200 in total. You are an agricultural contractor so the VAT flat rate for your business is 11% (not in the first year). Your flat rate payment will be 11% of 1,200 or 132 to HMRC. The difference of 68 is yours to keep. This 68 is to cover the VAT on input costs that you can t reclaim. VAT on certain capital assets over 2,000 can be reclaimed however. For example, if you buy a commercial van for 6,000 the VAT can be reclaimed even if you are operating the flat rate scheme. In addition, if you purchase several items from the same supplier and on the same invoice and the total invoice (including VAT) is over 2,000 then the input VAT can be reclaimed. However, if you purchase individual items on separate days from the same supplier and they equate to 1,000 each, no VAT can be reclaimed. It is therefore key to bulk buy smaller capital items as a single package to ensure full input VAT recovery is possible. VAT has to be accounted for on such items in the normal way if they are sold. The fixed rate of VAT will apply to all supplies made after registering for the Flat Rate Scheme. If you are newly VAT registered, you can make a pre-registration input VAT claim under normal rules. This will allow you to recover the VAT suffered on goods purchased in the previous 4 years (that you hold on the day of registration) and for services in the previous 6 months. Beware! Only one fixed rate will apply to all supplies made by the VAT registered person. For example, if you re a sole trader and your main business activity is agricultural contracting (11%) but you also run a furnished holiday letting business in your sole name (10.5%), the flat rate will be at 11% on all VAT supplies. If you also make zero rated, reduced rate or exempt supplies they have to be included in the flat rate calculation each quarter. The Flat Rate scheme does have its advantages, but you should consider how many of your costs are subject to VAT and if the flat rate gives you a cash advantage. If you are thinking that the flat rate scheme may be suitable for your business or you would like more information, please contact a member of the team. 4 autumn/winter 2018/19 issue 23
MAKING TAX DIGITAL (MTD) FOR VAT THE ESSENTIALS Applies to all VAT registered farm businesses with a taxable turnover above 85,000. Taxable turnover includes standard, reduced and zero-rated supplies but does not include exempt or income outside the scope of VAT. If you are voluntarily registered due to making zero rated supplies, say, livestock sales, you only must comply with the new MTD rules once you have exceeded the VAT taxable turnover test. From 1 April 2019, all VAT returns are to be sent to HMRC using MTD compatible software. Farm businesses will need to use computer software to keep their business records digitally. Deadlines for sending in VAT returns and making payments are not changing. If you use spreadsheets, the software used must be capable of taking the relevant information from the spreadsheet electronically and sending it to HMRC. autumn/winter 2018/19 issue 23 5
WHO OWNS THE FARM PROPERTY? Many UK farms are owned jointly which can cause issues with the question of succession or sale. For example, in some situations, people cannot afford to buy each other out. If one owner cannot raise funds to buy the interest of other joint owner(s), agreeing to sell might be the only option to release cash. There is also the possibility that some family members may not wish their interest to be acquired by other members. If the assets are partnership property, these potential issues should be considered and addressed through a partnership agreement. Open and honest disclosure of Wills and intentions between farming partners will greatly assist in the process. How the farm is owned is important for both Capital Gains Tax (CGT) and Inheritance Tax (IHT). There can be pitfalls, for example if two houses are lived in individually by brothers and sisters but each are owned jointly. In this scenario tax planning and legal assistance should be sought immediately. Jointly owned assets pass by survivorship unless the owners are recorded as tenants in common. Joint ownership of properties can restrict only or main residence relief for CGT if the farming partners live in different properties when they are sold. A possible solution would be to enter into a partition of interest under which the occupant becomes the sole owner of the property in which they live. Stamp Duty Land Tax (SDLT) or future CGT can be prevented although partitioning can be complicated. The new 3% SDLT charge on second homes can also result in harsh results if say a son or daughter who are not intending to live on the farm is left a share of the farmhouse. As with all farm tax reliefs, if you keep trading robustly you will achieve the most common tax benefits. When farmers have a Will drafted that leaves farming assets to non-farming beneficiaries it is essential to consider the impact on the continuing farming trade. If you are not certain about the ownership arrangements for property you have an interest in, then it is as well to check with your solicitor at the first opportunity. Having confirmed the situation appropriate action can then be considered to try and mitigate any potential tax liabilities. FARMERS AVERAGING For most farmers the wet and cold winter resulted in lengthy housing of livestock and a setback to crops. Then a heat wave hit the whole of the UK, impacting on the yield of grass and cereal crops which is likely to reduce farm profitability for the 2017/2018 and 2018/2019 accounting years. An extension to the 2-year averaging period was introduced from 6 April 2016 to a 5-year averaging period. The ability for farmers to average profits over consecutive years is an important provision which enables tax liabilities to be evened out by ensuring that personal allowances are utilised each year and where possible, the amounts falling into higher rate tax are minimised. Making a 5-year averaging claim in 2017/2018 means that averaging will apply for the period from 2013/2014 6 addition autumn/winter summer 2018/19 17 Issue issue 39 23
GIVING THE GAME AWAY Commercial shoots are those run with a view of generating a profit and are subject to tax. A private shoot where days or guns are taken only by relatives and friends, even if they contribute towards the cost of running the shoot should not be liable to tax provided everybody pays their fair share of the overheads. However, as soon as a gun/day or bird is promoted for let then the game changes! Legally, a commercial shoot is one where participants are attracted via marketing and are granted the rights to shoot in return for a payment, whereas a private shoot is via invitation. The gift of a day s shooting is not uncommon, particularly from the owner of a commercial shoot, but there may be tax consequences in receiving such a gift, on the part of the donor or the recipient. Gifts to family members who are not involved in the running of the shoot would not be regarded as business related and therefore the tax deductibility of shooting expenditure would be restricted by the cost of the gift. A gift to an employee during staff entertaining would be regarded as business use. While there would be no restriction required in terms of cost of the day, there may be a benefit in kind arising on the employee that would need to be reported to HMRC. Where a gift is made in respect of other supplies or services e.g. a day is gifted to a supplier of poults, this may fall within the context of a barter transaction and therefore the shoot owner would have to account for VAT on the open market value of the shooting provided and the supplier would also have to value his supply accordingly. Shooting has also been targeted by HMRC for PAYE compliance. Our advice is that good record keeping helps to support any claims for tax that HMRC may try and make. Do contact us if you have any concerns. to 2017/2018. A full review of each year needs to be carried out to ensure a 5-year claim is beneficial. It may be advantageous for example, where there has been a 3 or 4 year run of profits subject to higher rate tax followed by a loss-making year, or other instances when there is an unexpected change in fortunes. If in a farm partnership, calculations must be undertaken for each individual partner to see whether it is beneficial to make an election. A tax year cannot be included in a 5-year averaging claim if it has already been subject to a farmer averaging claim. For example, if 2017/2018 and 2018/2019 profits have been averaged, a claim cannot then be made to average profits for the 5 years up to and including 2017/2018 as it has already been subject to a claim. This limits the opportunity to use the 5-year option, but for many farmers the 2-year period will even out the liabilities reasonably well. Detailed projections and a crystal ball to forecast how the next 12 months of trading are likely to turn out will assist in making a decision about a 5-year claim. Discuss with us your thoughts and consider making a business plan so more informed business decisions can be made. autumn/winter 2018/19 issue 23 7
Rotherham Office: The Old Grammar School 13 Moorgate Road, Rotherham, S60 2EN Tel: 01709 828400, Fax: 01709 829807, Email: info@allotts.co.uk Doncaster Office: Sidings Court, Lakeside, Doncaster, DN4 5NU Tel: 01302 349218, Fax: 01302 321739, Email: donc@allotts.co.uk Website: www.allotts.co.uk Directors: Steven Pepper FCA Neil Highfield FCA Steven Watson BA ACA CTA Mark Garrison BCom FCA DChA Associate: Lisa Empson BSc(Hons) FCA Consultants: Jackie Saunders BA FCA DChA Tony Grice BA FCA Cert PFS Specialist Sectors: Farming & Agriculture Charities & Not for Profit Education Medical Services Sage Support Professional Practices Solicitors Trusts & Estates Allotts Services: Business Services Corporate Services HR Services Independent Financial Advisors (Provided by Allotts Financial Services Ltd) IT Services Payroll Services Taxation Services VAT Services Wealth ManagementTaxation Services VAT Services Wealth Management Allotts Chartered Accountants is the trading name of Allotts Business Services Limited This newsletter is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication.