Mid Term Review - Taxation Aspects

Currently the farming industry is in a state of uncertainty as a result of the anticipated mid-term review changes to the common agricultural policy. Although it is clear that major changes are about to take place the full detail of these have yet to be finalised. What is apparent is that the existing area aid scheme will be replaced by a single payment scheme which will be decoupled from the underlying land use to a large extent. The last minute change to the original draft proposals, which excluded the growing of vegetables or potatoes as being a qualifying use for the single payment scheme purposes, had a significant effect on the climate in which the scheme is likely to operate in the future.

Based on existing announcements from DEFRA and the widespread conjecture within the agricultural industry there are a number of aspects of the anticipated single payments scheme which are likely to have tax implications.

Income Tax
For Income Tax purposes it seems to be clear that the income under the single payment scheme will be taxable income. For fiscal farmers we anticipate that the income will qualify as farming income and will be assessable as part of farming profits under Case I of Schedule D.

The treatment of the income for individuals who continue to occupy the land but who do not opt to farm the land is not yet certain. By entering land into quasi set-aside it is possible that the individuals will receive income without actually carrying on a farming trade. This is likely to be taxed under either Case 1 of Schedule D as trading income or possibly under Case VI of Schedule D.

Having established the basis of taxation the next issue to be addressed is when the income is taxable. On the basis of pronouncements to date it appears that an entitlement to a payment accompanied by the occupation of an eligible hectare for a period of ten months will give rights to the payment of the amount fixed by the entitlement. In the first year of application the farmer must apply no later than 15 May 2005. Once the declaration and application has been made the right to the entitlement can be established and it is possible to calculate the entitlement subject to compliance with the detailed rules. Arguably the tax point follows from the date of establishment. Alternatively the receipt of the income may be attributable over the period of qualifying occupation. If establishment is deemed to establish the tax point there is a problem in that for some farmers two payments may fall in the same tax year, the last payment under the old rules and the first payment under the new single payment scheme rules. This can lead to a distortion of profits and the Inland Revenue have indicated that they are aware of the potential problem. This has been flagged for further consideration. It remains to be seen whether, when full rules for the scheme are available, this is dealt with by interpretation or by specific tax legislation. It should be pointed out that the Income Tax problem is mirrored by a potential distortion to the rules for Working Family Tax Credit.

Once an entitlement has been established and claimed for at least one year it is possible for this to be leased together with an equivalent number of eligible hectares. Initial views are that although the entitlement may be “attached to land” it clearly does not form part of the land or any interest in it. Accordingly the leasing income is anticipated to be taxable either under Case I or Case VI of Schedule D.

Capital Gains Tax
For Capital Gains Tax purposes it is not yet clear when the entitlement will be deemed to have been acquired. As transferability cannot be secured until 80% of the entitlements have been used during at least one calendar year and the farmer has given up all entitlements he has not used in the first year to the National Reserve, this is unlikely to be an issue in the near future. What is clear, however, is that original thoughts that the single payment scheme entitlement may be an asset derived from the underlying land have now generally been discarded. For sole traders and partners the entitlement is likely to be a business asset used in the business and accordingly will attract business taper relief. This however will probably not be the case where the entitlement is leased. For Limited Companies taper relief does not apply and the acquisition cost is likely to be virtually zero giving negligible benefit for indexation relief purposes.

Inheritance Tax
or Inheritance Tax purposes some of the main problems arise as valuation issues. These have been exacerbated by the general stagnation of the land market while the uncertainties of the mid-term review continue. Arguably land values will diminish because the area aid entitlement was attached to the land whereas the single payment scheme entitlement will attach to an individual who must then occupy land. The individual is at liberty to attach his entitlement to any land which he can occupy and does not need to attach it to specific land. In addition the entitlement, once established, will have a value itself. These valuation issues will be resolved in due course by reference to what happens in the market place and, where comparable evidence is not available, by negotiation with the Inland Revenue.

Value Added Tax
For Value Added Tax purposes once again the position is unclear but there seems no reason to expect that transferable entitlements will not be standard rated.

In summary it should not come as a surprise that the tax treatments considered above are uncertain; the whole scheme has major issues yet to be decided and no detailed rule book has yet been published. No doubt the taxing authorities will have their interpretations which they will advance and these will be debated by tax advisers. There are working parties involving the Inland Revenue reviewing many of these issues and their conclusions will doubtless be published in due course. When planning any changes in business activities it is essential that farmers consider the implications of those changes on the mid term review single payment scheme proposals. Generally the first priority appears to ensure that entitlement to single payment scheme payments is established. In due course this will introduce tax consequences which will need to be taken into account but at present maximising entitlement is likely for most people to be of key importance.

Please contact James Cater if you would like to discuss any of these matters further.