The tax consequences of farm diversification
Friday, 06 July 2018
In our recent blog we looked at some of the ways farmers could diversify, such as property rental, tourism activities or contract or organic farming.
This blog will explain some of the possible tax implications of these common diversification methods.
It goes without saying that you shouldn’t embark upon any new business venture without doing some proper research and planning. Aside from issues such as set-up costs, financing and potential planning application obstacles for some diversification projects, there can also be significant tax consequences. So it’s important to get it right from the start.
Profit earned from most forms of diversification will generally be taxed in the same way as farming profits, i.e. income tax for self-employed farmers and partnerships or corporation tax for companies. The project may even warrant a new business structure in which to operate the trade. However, there are also other taxes to consider.
Income from rental properties is classed as an exempt supply for VAT purposes, which will make your business as a whole ‘partially exempt.’ VAT incurred on expenses in relation to these rental properties can only be reclaimed if it’s below the de-minimis limit of £7,500 per year and is below 50% of the total input VAT. Therefore, when the property is in need of significant repairs, or a number of properties need substantial repairs at the same time, it may not be possible to reclaim all of the VAT. There can also be restrictions on recovering VAT on the conversion costs, or the project may be eligible for a reduced VAT rate.
There will be other VAT implications to understand depending on how you diversify. If, for example, you decide to open up a farm shop and café, there will be differing rates of VAT applied to different types of food sold from the shop (e.g. zero for vegetables, but standard 20% for confectionery). Food served from the café will be standard rated if consumed on the premises (including outside seating areas) but may be zero rated if it’s cold food and taken away by the customer.
Camping and caravanning activities of some sort are standard rated, but may require some private use adjustment if there are facilities provided for holiday makers that the owners also use, for example, a swimming pool.
The diversified business may need to employ more staff to run the venture, which, as well as increasing staff costs, will also increase the amount of employer’s National Insurance and pension contributions payable under automatic enrolment.
One of the biggest tax advantages of farming is that, upon death, qualifying assets get 100% relief from inheritance tax (IHT) through agricultural property relief (APR). Hence, if you were to stick purely to farming and had a modest personal estate below the IHT nil rate band (currently £325,000) then there should be no IHT to pay upon death.
Diversifying into other trading areas would mean that any associated assets would not attract APR. They may, however, attract relief at between 50% and 100% under business property relief (BPR).
As you can see, the tax consequences of diversification are wide-ranging. Discussing your ideas with your accountant at an early stage could save you a great deal of heartache and expense in years to come.
If you’re considering diversification, please get in touch and we can help you assess what the likely tax implications are so you can make an informed decision.
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