Taxes on Farming: Complete Guide for Farmers

Farming land has occupied approx. 70% of the total land area in the United Kingdom, which is far a big proportion .UK farms are quite bigger in comparison to rest of EU, hence the most common adapted business in UK is farming. Being such an extensive occupation, even farmers are supposed to keep accounts that form the basis of the tax computation in the UK. However, the British accounting system follows the traditional rules for accounting in case of farming tax computing specifically.

The structure of schedule is very old and assumed to be followed since 1803 at the time when introduced. According to the nature of the sources of earned revenue, the schedules for income tax are structured. Though, some amendments are also made later so as to sustain the system in the changing environment, keeping the characteristics of the British Income Tax. The Inland Revenue is responsible for the collection and management of the agri-business on the government level in UK, yet local taxes are payable to local authorities.

From 1998, farmers have been allowed to a self-assessment of the direct taxes to support the loyal participation of the farmers as well in tax computation. Every person involved in farming above the age of 18 is individually liable to pay farming tax on his/her own earnings.

Farmer’s Tax Planning Prospects

Farmer’s Tax Planning Prospects

Annual Investment Allowances, Agriculture Property Relief, Entrepreneur’s Relief, Farmer’s Averaging and falling Corporation Tax Rates created an opportunistic environment in tax dealing for the farmers and owners of agricultural business in the United Kingdom. Not only in tax exemptions but in facilitating farmers in arranging new equipment or other additional also, UK government is consistently moving ahead.

  1. Annual Investment Allowance
  2. The Annual Investment Allowance usually provides 100% deduction against the purchase of plant or machinery (subject to certain exclusions) up to an annual limit for agricultural purpose. This amount tends to revise every year, though has shown a decrease after 2015 from £500,000 to lesser but remain constant to £200,000 from 2016 onwards. Thus AIA still being a generous figure and essential aspect for the farmers as the used machines and equipment generally costs much higher.

  3. Agricultural Property Relief (APR)
  4. The Agricultural Property Relief provides a relief from Inheritance Tax (IHT) on the agricultural value of land and property under the certain conditions. This relief also covers applicable buildings and farmhouses used in coincidence with the farming land. Certainly, the farming business and land used to have some further conditions through which the relief is determined then whether to apply the same up to 50% or 100%. In case of in owned property, the land could be let on a Farm Business Tenancy (FBT) or the owner can rightfully also empty the possession within 24 months, may receive a 100% relief. Above all in general cases an exemption of 50% is available.

  5. Business Property Relief (BPR)
  6. Business Property Relief (BPR) is similar to APR but not constrained to agricultural property. BPR applies in case when APR is not fully applicable. The relevant business land though has an exemption of 100% or even case based a 50% relief is permissible. BPR applies with a condition of having a minimum property ownership for at least two years. If there are few additional properties engaged in farming process then even the BPR is available for the business as a whole facilitating the relief, however, primarily it must not involve in investments aspects.

  7. Plant and Machinery Writing Down Allowance
  8. Many farmers tend to get an additional source of income besides farming even. To make this relief available in case, farmers must ensure to have a detailed analysis of all the costs spent in the business. Since up to 18% of relief is available in this prospect. One must ensure that the relief is only available for setting up fundamental features involving into farming, but not for constructing oneself; some of these can categorized as: an electrical system, a cold water system, peripheral solar protecting, water heating system, ventilating system, air cooling or air purification system. On such features a relief of 8% is available.

    If an energy saving plant or equipment is proposed to set up in the property then on certain conditions 100% of relief is available on the purchase of such items. Hence, one must be careful during the installation of such equipment so as can claim back the full price.

  9. Potentially Exempt Transfer
  10. A lifetime gift given or received by an individual may also qualify for APR, yet it will included as a Potentially Exempt Transfer (PET), and won’t be liable for inheritance tax if has sustained till for 7years. Furthermore, on failing PET, a further verification will also be made initially, in the outlook of donor or receiver’s death, though the tentative tenure is also considered in the authentication.

    Farming Tax – Different Aspects and Issues

    Farming Tax – Different Aspects and Issues

    Though several reliefs and exemptions are offered by the government supporting the farmers engaged in the relevant business, still have some detailed rules and aspects one need to aware when claiming for the same. In spite of having unique tax reliefs, the relevant rules set by UK government and issues must need to be resolved prior.

  1. Inheritance Tax
  2. Currently, the property’s privilege to APR and BPR is hugely affected by the changing trends in the usage of farm building for commercial activities. On such conditions an Inheritance Tax (IHT) will be applicable.

    • Since APR essentially provides a relief from IHT for agricultural value, yet such activities are tending Inheritance Tax a crucial and complex aspect, hence proving the APR an invaluable relief. IHT being an expensive prospect, if a land is occupied by someone not involved in farming won’t be liable to claim for APR if unless the occupier is : a retired farm employee; residing under lease or contract; a protected tenant with statuary rights or a spouse or civil partner of the deceased farm employee.
    • IHT is basically applicable on the estate of someone who deceased. Anyone if has an onset of £325,000 (or £650,000 combined), or an additional verge valued up to £2 million to pass on the family may come under the entitlement of IHT.
  3. APR Issues
  4. Agricultural Property Relief (APR) is only available on the agricultural value of the business land. Differentiating into other practices could have disqualified the land for APR. Inappropriately, the inheritance tax regulation does not incorporate the term agriculture to process with. Hence, to proceed with the APR avoiding the IHT as whole is bit difficult thus one must follow the guidelines set by HM Revenue and Customs (HMRC) to deal with such blurriness.

  5. Diversification Issues
  6. Tenants must be enabled to diversify to farm businesses, widening the scope of availing the tax relief on the farming land. Hence, to avail the benefits of the reliefs on the agricultural property, the owner must ensure to encourage the farming activities to ensure more profitability and securing an opportunity to claim for APR resolving the diversification issues. However, BPR is not available as a key mode since the landlord won’t be the person operating the business on the rented land.

  7. The Exclusions
  8. Unlike other aspects, keeping animals for grazing or entertaining riding or other purposes may form an exclusion from claiming for relief; however keeping animals like horses for farm work particularly may be categorized as agriculture. Hence it is too important to have a grazing license through an agreement with HMRC before leasing the land for grazing purpose. It must be noted here that abandoned buildings should not be occupied for the purpose of farming process; this would also by lying in the exclusions, yet BPR is available in many cases.

  9. VAT
  10. Sales in farming prospect usually computed at zero rated for VAT thus keeping the farmers in a compensation position, in VAT submission. Henceforth, it is important to have a well-timed check whether the sales are zero rated, exempted, regular rated or condensed rated. Also, if the farm is VAT registered then operating any new business on the same land will also need to be VAT registered separately; however at the time of Inheritance Tax planning this approach will not be that much beneficial.

In Summary

Since the taxation rules for agricultural prospect is complex, crucial and unique on the same aspect, hence it’s so essential to consult with a financial advisor having an expertise in farming industry’s taxation system and reliefs process. Moreover, agricultural profitability completely depends upon the climatic conditions thus before proceeding to the tax calculation of relief estimation. However, HMRC has shown consistent interest in agricultural businesses specifically about small business occupies less than 20 acres of land or in case if the owner is not actively involved in the farming process. Though dissimilar farming activities or aspects may have different tax system followed by the exemptions schemes, yet essential to have a serious observation into the processing and farming aspects, practicing in the land.

Hence to ensure the maximum relief in the taxation also to settle the inheritance tax treatment, may subject to change due to different use or impact of new regulations and guidelines prescribed by HMRC.

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About the author
Blog Author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.

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About the author
Blog Author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.


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