Budget 2011 – what does it mean for dairy farmers?

When George Osborne left No. 11 Downing Street on Wednesday 23 March  ’11 with his famous shoddy budget briefcase, many feared more doom and gloom ‘austerity cuts’ as the coalition government seeks to deal with the budget deficit.  However, despite this fear, many in the business community gave a guarded welcome to the budget with the cut in fuel duty by 1p/litre making the newspaper headlines.   But what are the issues dairy farmers and their accountants need to think about?  Here are a few of our suggestions:

Over recent years there have been changes in capital allowances for Income Tax and Corporation Tax.  Capital allowances on agricultural buildings have been phased out, however, many components of building projects can be classified as plant and machinery and thus attract capital allowances.  Indeed some projects in their entirety can be regarded as plant, such as:

The Chancellor announced a number of further changes to capital allowances. He reduced the rate of writing-down allowances on the main pool of plant and machinery from 20 percent to 18 percent from April 2012.  Additionally, the rate for the special pool (which applies to long-life assets, integral features and certain high-emission cars) will be reduced from 10 percent to 8 percent.

He also confirmed that the annual investment allowance will be reduced in April 2012 from £100,000 to £25,000.  The annual investment allowance enables businesses to claim full tax relief (100 percent deduction in year one) on most types of plant and machinery up to the limit, rather than having to claim writing-down allowances on the reducing balances in a pool.  

For most, these changes will make it more tax efficient to make investments in plant and machinery during this tax year.

The Chancellor also increased the period over which expenditure on plant or machinery can be given the ‘short life assets’ treatment.  This effectively accelerates the period over which capital allowances are obtained on qualifying short life assets. He extended it from four to eight years and this will benefit farmers investing in plant or machinery in excess of the annual investment allowance. Dairy farmers should consider electing for short-life assets treatment in respect of assets which have been previously excluded due to their expected useful life.

Annual Investment Allowance is fully utilised in the year ended 31 March 2012 and an additional machine is purchased for £40,000.  It is expected to be traded in five years later for £10,000.  The allowances given on the machine over the five years will be as follows:-

For many years pensions have proved to be a valuable tax planning tool.  From the current tax year it is proposed that the annual allowance will be set at £50,000.  Any contribution in excess of this would be charged to tax on the individual as their top slice of income.  Any unused annual allowance can be brought forward for the next three years.  When looking at whether there is unused annual allowance from 2008/09, 2009/10 and 2010/11, the annual allowance for these years is deemed to have been £50,000.   

As dairy farmers face widely fluctuating year-to-year incomes, it is important to have flexible pension plans to make best use of this relief.

Farmers and landowners may also benefit from an increase in the limit for Entrepreneur’s Relief, which reduces the Capital Gains rate to 10% on eligible disposal proceeds up to £10million in a lifetime – double the previous limit of £5million.  This is good news for farmers selling land for development.

Entrepreneur’s Relief relates to Capital Gains Tax which is charged on the capital gain arising from a business asset.  For an individual the annual exemption is only £10,600 and the standard tax rate is 28 percent for higher rate tax payers.  This makes it more important than ever that farm assets qualify for this relief.  A recent tribunal case in Northern Ireland confirmed the HM Revenue and Customs view that a parcel of land which was let out as conacre did not qualify for relief because the owner did not have sufficient active involvement in farming the land to constitute a business.  The Revenue reviews each situation on a ‘case by case’ basis to see if the landlord has had sufficient active involvement in farming the land.  This involvement may include cutting hedges, maintaining drainage, fences, water troughs and access routes, in addition to reseeding and applying fertiliser and lime along with other mainstream farming activities.   

Most dairy farmers take land in conacre – dairy farmers on the Benchmarking at CAFRE programme farm over 40percent of their land through conacre agreements.  The result of this ruling might mean that landlords will be keener to demonstrate they are actively farming the land and may want to take more responsibility for activities the farmer taking the land in conacre may have been previously responsible for.

The IHT nil rate band is frozen at £325,000.  Farmers will be content there was no change in Agriculture Property Relief – this enables agricultural assets to be transferred without an IHT charge. Again, this has implications for conacre with the onus being placed on the landowner to show they are actively farming the land.  For the benevolent minded, anyone gifting 10% of their estate to charity will receive a 4 percent reduction in the Inheritance Tax rate charged (36 percent versus 40 percent).

The Office of Tax Simplification has recommended a complete review of the Inheritance Tax regime so expect changes in the future.

The budget contained a surprise 2 percent decrease in the rate of Corporation Tax, to 26 percent from April, and stepping down to 23 percent over three years, this will help farmers trading as limited companies. However, there is no change in the small companies’ rate of Corporation Tax (profits under £300,000), which remains at 20 percent. The Chancellor announced a review of Corporation Tax in Northern Ireland which may lead to further reductions in the future.  Dairy farmers should ‘watch this space’ because there may be benefits for some farms in changing their business structures into limited companies.

The Office of Tax Simplification continues its work on the simplification of the whole tax system. The Chancellor announced his intention to abolish 43 tax reliefs for which the rationale is no longer valid.  This demonstrates just how complex the system is and the importance of working closely with your accountant.  A good professional relationship will help farming families plan the development of their business and protect against unnecessary tax liabilities.

William Henry, Partner, Moore Stephens, Limavady

Nigel Murphy, Senior Business Technologist, CAFRE

Make best use of capital allowances this year as the annual investment allowance will reduce to £25,000 from April 2012

Landowners need to demonstrate their active involvement in farming to make best use to benefit from Entrepreneur’s Relief and Agriculture Property Relief