Tax and money management tips for diversified farm businesses

As farmers and landowners move towards further diversification, they find themselves with a farm made of multiple farm businesses. It is important to ensure that these individual farm businesses are set up in such a way to ensure maximum benefit to the farm. For some farm businesses, separation is key but others may benefit from overlap.

Many new diversification ventures have been set up in the past 18 months, often relating to threats or opportunities brought about by the pandemic. Farmers Weekly asked advisers for their tax and financial management tips for these new enterprises.

If you are going to run a new venture which is quite different to the rest of your farming activity, setting up a separate bank account can be helpful, whether it is part of the farm business or not, says Iain McVicar, partner in the farms and estates team at accountant Albert Goodman.

“This will help keep track of the money spent on it and whether the business is generating cash.”

The lower your initial capital expenditure, the lower your risk. “Therefore for an untested new business, keep capital expenditure as low as you can,” advises Mr McVicar. “Buy second hand and make do and mend to start with. Once you are more certain that the business is going to be a success, you can invest with more confidence.”

If the new business contains significant risks, consider running it using a limited company or limited liability partnership. This will ring-fence liabilities of the new business and help protect the valuable land, buildings and stock that farm businesses own.

“Where losses are expected from the new business, these may be available to offset against farm profits, reducing your tax bill. However, losses from a new business do need some common ownership for the losses to be used,” says Mr McVicar.

For example, if one farming business partner is also a partner or a sole trader running the new venture, that person can offset losses in the new venture against their share of the farming profits.

“Equally someone setting up a new venture who was previously employed can offset the new venture losses against taxable income from the previous year’s employment. This only applies to sole traders and partnerships, including limited liability partnerships, but not to limited companies,” he advises.

VAT considerations for your farm businesses

One of the big considerations is often whether to carry out a new venture in an existing VAT-registered farming business or set up a new entity, for example a sole trader or different partnership, says Nick Dee, a partner at Hazlewoods.

“If the new enterprise will be making taxable supplies to non-VAT-registered customers such as furnished holiday let accommodation, camping, clay pigeon shooting, maize maze entry and so on, then it’s often attractive if the turnover is less than the £85,000 VAT registration threshold to have a separate business so there is no need to charge VAT,” he says. “This is particularly useful where there is little input VAT on costs to recover.”

The general rule is that rental income is an exempt supply (no VAT to be charged), but rental of buildings and containers for storage is a taxable supply, as is caravan storage, provision of car parking, holiday letting and so on. Mr Dee advises that any separate business must be genuinely separate from the main VAT-registered farming business with its own accounting records and bank account. Any transactions between the two must be on an arms’ length basis.  For example, if the non-VAT-registered diversification enterprise uses a tractor from the farm, then the farm business needs to charge a commercial rate plus VAT for that use.

“The irrecoverable VAT on this would be an extra cost for the diversification business, which should be budgeted for,” says Mr Dee. “Equally, diversification activity should bear its own share of overheads such as telephones, or have an admin charge from the farming business as with the tractor.”

Paul Topham, a partner at accountant Azets, points out that where the diversification activities are exempt from VAT, this could restrict the ability to recover input VAT and partial exemption rules may apply, which are complex. He suggests that in such cases, a possible route is to make a formal VAT election known as an option to tax, which will convert the supply to standard rated on which VAT will be applied at the usual 20%, but allowing recoverability of input VAT.

Keeping things straight

It is common among farming families that land is held in different names to those carrying out either the farming business or the diversified venture. Keith Johnston, senior tax manager at accountant Armstrong Watson, advises making sure that asset ownership is clearly documented, to avoid tax and legal issues further down the line. Also, a family business occupying part of the farm for a new venture should be treated in exactly the same way as a third party.

“This includes charging a rent and ensuring it is paid on normal commercial terms,” says Mr Johnston. “If the new venture has employees, a new PAYE scheme is also required, separate from the farm. Similarly, a separate pension scheme is required to comply with auto-enrolment legislation for workers.”

HMRC is pushing ahead with Making Tax Digital, which requires all taxpayers to maintain digital records and regularly submit them to HMRC. Mr Johnston advises those starting a diversified venture to get to grips with digital records at the outset.

Decreasing use of cash means that many diversification enterprises will need to accept card payments, points out Joanne Thomlinson, a partner with accountant Dodd & Co.

“This is much cheaper and easier now with apps like Sumup and iZettle, but you will need a smartphone or tablet generally. The downsides with these are that you will need access to wi-fi or data, which is often an issue in rural locations,” says Ms Thomlinson. “There are also websites that list availability, take bookings and payments. There are far more options available now than there used to be, so do your research before you pick someone to work with. With newer cloud-based accounting software such as Xero and Quickbooks, it should be possible to pull though sales data from booking systems, which should make record keeping easier.”

Longer-term considerations for your farm businesses

One of the biggest tax advantages of farming is that, upon death, qualifying assets receive 100% relief from inheritance tax (IHT) through agricultural property relief (APR). Diversification can prevent this relief from being applied, although in some cases business property relief (BPR) could be available instead which would give relief between 50% and 100%. The rules in this area are complex and care is needed to ensure conditions are met, warns Mr Topham. Depending on the level of income from the diversified activity, without careful planning, the existing farm business may not be considered “farming in the main” by HMRC, jeopardising valuable benefits such as APR.

Also, while the new venture may bring cash and new profits, where land and buildings are being developed or converted to accommodate the new venture, consider the possibility that this could devalue the farmhouse or farm itself, rather than adding asset value.

A limited company pays tax on its profits at corporation tax rates (currently 19%, although increasing to 25% from 1 April 2023 for profits over £250,000), whereas a partnership or sole trader pays 20% basic rate tax, rising to 40% for higher rate taxpayers. A limited company can claim the 130% new super deduction for qualifying expenditure on plant and machinery. A partnership may qualify for 100% capital allowances.

Separate accounts, even if one farm business

Whether a diversified activity is run through a separate business or as part of the farm, it is always advisable to separate the accounting, advises Mr Topham. This avoids income and expenditure all going into one ‘pot’ which would make it hard to establish the true performance of each side of the business.

“This is even more important if the structure chosen for the business is different to that of the farm. The diversified business may have different partners or shareholders to the farm and as such, profits would need to be identified and allocated correctly.”

Article taken from farmer’s weekly