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HMRC published their long awaited guidance on the taxation of payments
received under the
Single Payment Scheme (in Scotland, the Single Farm Payment Scheme), as
a Special Edition of Tax Bulletin, on 24 June 2005. Speaking at the lCAEW
Farming and Rural Business Group's Annual
Conference a few days later, Peter Lees, the Inland Revenue's principal
farming specialist, accepted that the guidance is not yet complete, in
the sense of covering every possible situation, and that further development
can be expected. At the same time, he confirmed that the Tax Bulletin
was written with a view to incorporating most of its contents, word for
word, in the relevant Inland Revenue Manuals.
The guidance deals with each of the main taxes (including VAT) in turn:
Income Tax
Single Farm Payments will in all cases be receipts subject to Income tax.
Depending on the circumstances, the SFP may be taken into account as a
receipt of the trade of farming, as a receipt of some other trade for
which the land is used, or as what was, under pre-ITTOIA terminology,
a Case VI receipt.
Peter Lees emphasised that 'we need production in order to say there is
a trade of farming' - in other words, HMRC's position is that 'farming'
necessarily consists of growing and harvesting crops and / or of rearing
farm animals. Nevertheless, HMRC accepts that farming may continue even
though part of the holding is no longer used for production, or even though
production has been suspended altogether while the farm business is being
reorganised.
If farming has ceased, but the land is managed on a commercial basis and
with a view to the realisation of profits, section 10, ITTO (section 53(3),
Taxes Act 1988) deems this activity to be a trade and the SFP will be
a receipt of that trade. Whether any expense is deductible will depend
on the usual 'wholly and exclusively' rule.
A point to watch here is that grazing horses is an acceptable use of land
for SFP purposes but does not count as 'farming' for United Kingdom tax
purposes (unless, very exceptionally, the horses are working farm horses).
Where a landowner uses his land partly to graze his own family's horses
and ponies, and
partly to graze other people's horses and ponies in return for payment,
the Revenue's view is that, although he is carrying on a section 10 trade,
most of the expenses are likely to be disallowable under the 'duality
of purpose' rule.
Where no trade is carried on, the SFP will be (in old money) a Case VI
source. Deductions will only be allowed to the extent 'it can be shown
additional expenditure has been wholly and exclusively laid out to secure
the Single Payment'. No examples of potentially qualifying expenditure
are given! In practice, how-
ever, it is thought that the overwhelming majority of landowners will
be carrying on some activity on their land which amounts to farming or
a section 10 trade.
However, an important point to watch is that relief for farming losses
brought forward will be lost unless the trade of farming continues. This
might be an argument in favour of entering into a share farming agreement
rather than simply letting land to a neighbouring farmer.
Contrary to previous indications, it has been decided not to withdraw
the guidance on valuing farm stock currently found in BEN 19, though 'it
is worth noting that the Single Payment, with the exception of the Scottish
Beef Calf Scheme (SBCS), is not linked to any particular crop, product
or expense and [so]
should not be taken into account in any calculation of the cost of stock'.
Finally, the point at which the SFP should be recognised as a trade receipt
will depend on United Kingdom GAAP and guidance on this issue has been
published by the ICAEW and ICAS.
Capital Gains Tax
To qualify for a Single Farm Payment in any year, the claimant must first
have secured a 'Payment Entitlement' (PE) either by submitting a successful
claim for 2005 or by purchasing, etc, a PE from an existing holder. Although
the PE will originally spring from the land, it will be a tradable asset
and so, in
the view of HMRC, it will be a freestanding asset, not permanently linked
to any particular parcel of land. It will be treated as having came into
being on 1 January 2005 at a nil base cost.
The Tax Bulletin goes on to state that: 'Transactions carried out before
1 january 2005 involving a disposal of a future entitlement to PE will
be treated as a disposal of an asset in the form of a right to future
PE rather than a disposal of PE itself.' Unlike the PE itself (see below),
this right to a future PE will not be a business asset for taper relief
purposes (though exactly why not is not explained).
Also, the implications of this ruling for the purchaser are not spelt
out - for example, is the price paid for the right rolled over to become
the base cost of the PE, or does the right expire, and so become of negligible
value, on 1 January 2005?
Other points are that Payment Entitlement will not be a wasting asset
and that:.-
* Business Asset Taper Relief (BATR) will generally be available for
a PE if the SFP is taxed as a trade receipt. A farmer who is granted a
PE at the inception of the scheme (as contrasted with one who urchases
a PE from the original grantee) can count his two-year qualifying period
for 75% BATR from 1 January 2005.
*.When held by a company, PE will be subject to the intangible assets
regime.
Quotas, other than milk quotas, are now accepted as valueless and negligible
value claims as at 31 December 2004 may now be made. Because their future
is uncertain, milk quotas are still not to be treated as wasting assets.
Payment Entitlement transferred to landlord
It seems to be quite common for tenancy agreements to require the tenant
to transfer his PE to the landlord, often for a nominal consideration.
The Tax Bulletin states that this will be taxed as a market value transaction
'where the parties are either connected or are acting otherwise than at
arm's length'.
The Tax Bulletin also indicates that where a tenant transfers his PE to
his landlord, this may count as a premium for the grant of the lease,
creating a tax charge for the landlord based on the capital value of the
PE. If the tenant receives a benefit in exchange (as in most cases he
will have done, if only by way of
paying a lower rent) it would seem that he has made a market value disposal
in this situation also.
Until experience of, and expertise in, transactions in Payment Entitlements
have built up - and until further Revenue guidance is available - any
proposals for 'non-cash' transfers of PEs should be very carefully considered,
to identify any ways in which the Revenue might seek to impose an unexpected
tax liability.
Inheritance tax
Points to watch are that:
* Because a landowner's Payment Entitlement {PE) is an asset separate
from the land, it cannot under any
circumstances qualify for Agricultural Property Relief {APR).
*.However, the land itself may still qualify for APR, even though it has
temporarily been taken out of production, provided there is ian intention
or expectation that the land will be back in production at some time in
thefuture',
* Land used for grazing horses {other than working farm horses) will not
be counted as land 'occupied for the purposes of agriculture' and so will
not qualify for APR.
*.Where a farming business was transferred before 1 January 2005, HMRC
believe that the valuation
should include 'the benefit of the expectation of a future Payment Entitlement',
Exactly when that ex-
pectation arose is only one of questions left open for future debate!
* Payment Entitlement will qualify for Business Property Relief (BPR)
in the hands of a working farmer 'on
the assumption, which will usually be the case, that the resulting [Single
Farm] payment will be used in the
business or be required for future use in the business'.
*.Because entitlement to BPR depends on ownership of the business (or
of an interest in the business), not on ownership of the specific asset,
for a minimum period of two years, most working farmers will be entitled
to BPR immediately.
Finally, the Tax Bulletin confirms that: 'PE will still qualify for BPR
where the owner has put farmland out of production, for example into Set-Aside,
provided the farmer is still carrying on a business on a commercial basis,
and provided the nature of the business remains essentially that of a
trading concern rather than one that consists of dealing in land or making
or holding investments.'
Value Added Tax
Payment of SFP will itself be outside the scope of VAT, but sales and
other transactions in PE may be subject to the tax - the Tax Bulletin
provides an explanation.
If no trade is carried on, so that the SFP is a Case VI source, the landowner
will not be entitled to register for VAT and so will not be able to recover
any VAT suffered on relevant inputs.
Accounting and timing issues
The Tax Bulletin also reproduces, as an Appendix, Guidance on Accounting
Issues Arising from the Single Payment Scheme (Tech 19/05), issued jointly
by the ICAEW and the ICAS in May 2005. This guidance is made necessary
by the complexities of the SFP scheme - the following is a brief outline
to explain the basic principles of the accounting guidance.
An SFP claim will always be for a calendar year, the first relevant year
being the year to 31 December 2005. Claims have to be made by 15 May within
the year of claim ( 16 May 2005 for the current year, as 15 May 2005 was
a Sunday). Payment will normally be made between 1 December during the
year of claim and 30 June following the year of claim (so between 1 December
2005 and 30 June 2006 for 2005).
To make a successful claim for any year, the claimant must first either
have established a Payment Entitlement (PE) by making a successful claim
for 2005 or have bought a PE from an existing holder. He must then have
eligible land available for his use in the year of claim. (Note that a
PE is not attached to a particular parcel of land, so that a claimant
could - for example - establish his PE for 2005 by virtue of his occupation
of Blackacre and then, in 2006, claim a SFP by virtue of his occupation
of Whiteacre - the exact rules as to what is possible are complex and
outside the scope of this article.)
The relevant land must be occupied for at least ten consecutive months
- the default period is 1 February to 30 November within the year of claim,
but the claimant may elect for any period beginning no earlier than 1
October before the year of claim and no later than 30 April within the
year of claim. Entitlement to a SFP for any year then finally depends
on the claimant satisfying the 'cross-compliance' conditions in relation
to that land (principally, the obligation to keep it in 'Good Agricultural
and Environmental Condition' (GAEC)).
The starting point of the ICAEW / ICAS guidance is that the Single Farm
Payment is a grant and so cannot be recognised as income until the qualifying
conditions have been met. In practice, it can be assumed that the cross-compliance
conditions will be satisfied, so that the SFP can be recognised as income
on the last day of the ten month basis period. Subject to that, it should
be spread equally over the calendar year of claim.
Suppose then that a farmer's accounting date is 30 September and he adopts
the 'default' basis period of 1 February to 30 November. For the year
to 30 September 2005, there will be no SFP to include in his accounts,
as the first basis period (ten months to 30 November 2005) does not end
until after his accounting date. Strictly speaking, 11/12ths of the SFP
should be taken to profit and loss account on 30 November 2005 and the
balance on 31 December 2005, but the practical effect, so long as the
farmer changes neither his ten month basis period nor his accounting date,
is that the SFP for any calendar year will be included as income of the
accounting period ending on the following 30 September.
However, suppose the farmer had chosen a basis period of 1 October 2004
to 31 July 2005. The ten month basis period would then have ended before
his accounting date, so that 9/12ths of the SFP for the calendar year
2005 should be taken to profit and loss account for the year to 30 September
2005
and 3/12ths for the year to 30 September 2006.
It is also possible, if the farmer changes his ten month basis period
from one year to the next, for more than one year's SFP to be taken to
the profit and loss account for a single accounting year - the ICAEW/
ICAS guidance gives a worked example.
If you feel you may have a problem with this issue and wish to discuss
it call
Stuart Atkinson on 01482 226791
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