Saturday’s BC Radio 4 Today programme broadcast an interview with Prof Dieter Helm, the economist who chairs the government’s Natural Capital Committee. Prof Helm made some cogent points about the ad hoc development of various policies for the agricultural industry, calling farmers subsidy junkies along the way and highlighting ‘exemptions’ from tax. He particularly mentioned Diesel, Rates and Inheritance Tax. But is Prof Helm right? Are farmers treated any differently than the rest of us?
Diesel. Farmers use so-called Red Diesel in their tractors and other land machinery. It is red because it has been stained to distinguish it from diesel on which petroleum duties are levied (often called DERV – Diesel Oil for Road Vehicles, Diesel Engined Road Vehicles). Red diesel is also called Gas Oil. Farmers must use DERV in vehicles which must travel on public roads a lot for example pick-up trucks, or tractors used extensively on the public road. Other industries that use diesel engines off the public road also use red diesel, notably the construction industry, quarrying and rail transport. Boats with diesel engines also use red diesel, whether for commercial or leisure operations. Customs Officers are regularly to be found at agricultural markets and country shows ‘dipping’ vehicle tanks for the tell-tale red stain. So no difference here from other industries: we all pay more fuel tax on vehicles which go on the public road but don’t have to pay it on off-road vehicles. VAT is also payable on fuel and in this respect the farming industry is also no different from other industries. As an aside, landowners who do not farm are generally unable to reclaim VAT.
Rates: Farming has been exempt from the general property rate since the 1930’s. The history of agricultural rating goes back further to the 19th century when farm land was generally subject to a reduced rate. It is however little known that about 11% of the land area of England and Wales is subject to a rate on farmland, in the form of the rates levied in the Internal Drainage Districts. These are used to pay for the upkeep of local drainage systems which benefit farmland and other properties in the areas concerned. Like the rest of us, farmers pay Council Tax on their houses.
Inheritance Tax: Farmers may benefit from Agricultural Property Relief on the value of most of the farm when they die. For an owner-occupier who satisfies the rules the rate of relief is 100% of the agricultural value of the property, which in practice can be less than its full market value. So a special concession for farming? Well no not really. Other businesses (and indeed farming businesses on their other assets) also qualify for Business Property Relief. This relief is also set at 100% for most cases and is given against the market value of all the assets used in the business. The idea behind both reliefs is to keep capital in the business. For sure, agricultural landowners can also claim a variety of agricultural property relief but the radio remarks were about farmers not landowners.
Business Property Relief has some further surprises. For example many of the shares quoted on the Alternative Investment Market (AIM) also qualify for 100% Business Property Relief. Furthermore the income from those same shares is taxed at lower rates of Income Tax than earned income including trade profits: the first £5,000 of dividends are free of any Income Tax, basic rate income tax is levied at 7.5% instead of 20%; higher rate at 32.5% instead of 40% and additional at 38.1% compared with 45%. Grateful thanks indeed for investors who are willing to invest some capital in AIM stocks and wait for the income and gains to roll in (while of course accepting the risks of losses).
To highlight the comparison, consider £5 million invested in a farm, another business or AIM stocks and shares. In each case the combination of reliefs could reduce the taxable value of this investment for Inheritance Tax purposes to zero. Along the way the owner of the shares will pay less Income Tax per pound than either the businessman or the farmer, whose tax bill will be broadly similar at similar levels of profit. The farmer’s return on his £5 million is however, likely to be considerably lower than either the share owner or the businessman, with or without subsidies.
The interview on Radio Four can be heard at this link for the next 29 days. It starts at 1 hr 10:03 mins and finishes at 1:20:50. It’s fairly characteristic of the uninformed and poor insight shown into questions of rural, farming and food policy shown by so much of our public media. John Humphrys and Radio 4 really should be able to do better, even in just 10 minutes.
A few copies of Concise Rural Taxation 2016/17 are still available for any reader whose appetite has been whetted for rural taxation. See the separate tab for order details, or wait until the autumn for the next edition.