Agriculture & Rural Business Newsletter – June 2017

Farmers Averaging

Due to the volatility in prices and incomes in the farming industry, the government has recently changed the rules to allow the profits of the business to be averaged over a 5-year period. This option was introduced on 6 April 2016, allowing businesses to average over 5 years from the 2016/17 tax year. As this tax year is now complete these calculations can now be done. We have seen significant tax savings already for those who have looked at 5-year averaging. If this is something you wish to consider please get in touch.

Grazing Land – Trade or Investment?

There is much uncertainty as to whether a landowner with grazing land is considered to be a farmer with trading income or a landlord with rental income. The tax consequences of this distinction are significant especially for the future inheritance tax or capital gains tax position of the land.  The critical question, for the landowner, is whether he is farming the land, or whether he is merely receiving rent for the use of it.

Land considered to be part of a trade and a farm can be eligible for agricultural and business property relief for inheritance tax and can qualify for holdover reliefs and possibly entrepreneur’s relief for capital gains tax.  Investment property seen as producing rental income does not qualify for any of these reliefs.

Two recent Tribunal cases that have shown that the decision can go either way. However by looking at the cases, it shows that there are ways to improve your case if you intend for the land to be seen as part of the farm and treated as part of the trade.

The Allen case ruled in favour of the landowner using his land for trading purposes.  The salient points leading to the decision appear to be the facts that the Allen’s maintained the rights to lairage (temporary housing of animals on the land), they supplied fertiliser when needed, maintained the land including fences and hiring contractors to maintain hedges and weeds.  While Mr Crooks was entitled to graze his stock on the Allen’s land, he was only responsible for repairing damage directly caused by his stock.

The comment from the judge on the husbandry, that the fertiliser was supplied when needed as the grass was becoming weak showed an awareness of the land, its condition and the need to maintain it. This was important in the ultimate ruling that the Allens were farming the land, managing the land to maximise grass crop and maintain quality.

The decision did not go the same way in the case of McCall and Keenan who were found to be renting land rather than farming.  It was noted in this case that the landowner did not take any steps to maximise grass crop production or quality which supports the point that if this had been the case McCall and Keenen may also have been found to be farming.

The cases along with the legislation show the importance of both the legal agreements in place, the landowners access rights over the land as well as the

If you own land that is let out for grazing consider these points and review the agreements in place and make sure that where possible it is clear that the occupation and possession of the land and soil is in the control of the landowner with the grazier having a right for a limited period for his stock to eat the crop.  There must be substance to support the factual position rather than simply an agreement such as a record of your weekly activities with regard to the land.

Making tax digital

There has been much written about the Government’s Making Tax Digital proposal. HMRC have published guidance setting out how it is intended to operate, although as yet, nothing has been finalised.  There was a huge response to the HMRC consultation in 2016 and now we have a mixture of fact, rumour and speculation.

Due to the nature of many rural business especially farms and estates, many are concerned as to how this will work.  Our full article on making tax digital sets out the facts that are known, how these may affect you and how we can all prepare for this new way of preparing and submitting your accounts and tax to HMRC.

When is a puppy second-hand?

The recent VAT decision for Little Rascals Pets Limited has confirmed that dog and other pet breeders must charge VAT on the whole of the selling price.

With the exception of animals which can be sold at the zero-rate – typically those which are bred to be eaten, or to generate a product to be eaten, such as livestock – animals held out for sale as pets (including ornamental fish) are taxable at the standard-rate of VAT (20%) when sold in the UK by a VAT registered entity.

In the case of Little Rascals (a dog breeder who bought and sold puppies), they charged VAT on all their sales except when they had bought the puppies from someone that was not VAT registered.  In those instances, they used the second-hand margin scheme to calculate their profit, and accounted for VAT from the margin.

The second-hand margin scheme is an optional way of accounting for VAT on the value that businesses add to goods sold, specifically goods which have been bought from a seller that was not VAT registered (such as private individuals).  There are strict rules in using the scheme however, and if a business does not adhere to these rules, HMRC can assess VAT on the whole of the sale price, rather than just the margin.  This is what happened to Little Rascals.

The definition of ‘second-hand goods’ in VAT law means “tangible moveable property that is suitable for further use as it is”.  In making their decision, the First-Tier Tribunal homed in on the word ‘use’, determining that the business did not ‘use’ the puppies as pets, but as stock for resale.  The business could not therefore, treat the puppies as ‘second-hand goods’ under the scheme, and VAT was due on the full selling price.

In clarifying the position, the Tribunal commented that the treatment of the puppies by the business “lacks the individual care and attention, and mutual relationship of trust and affection, which would normally characterise a relationship between an owner and a pet”, further adding that “any head patting was an incidental part of the puppies’ socialisation and preparation for onward sale, and was not usage as a pet”.

If you have any questions regarding the above or have any other VAT queries, Henderson Loggie has a specialist VAT team who can assist with any VAT concerns you may have.