Farming tax breaks: true or false

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.

–ooOoo–

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.

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New Brexit Blog

I have set up a new blog site solely dedicated to Brexit, Farming and the Rural Economy.

You can see it here, and in particular a page of links to useful information which I hope to keep updated with relevant publications and other sources of Brexit information as they appear.

I hope you will find it a useful resource.  Please send in any suggestions for material you think is needed, or other suggestions for its development.

Agriculture: Five Great Challenges

Jeremy Moody, Secretary and National Adviser to the Central Association of Agricultural Valuers, spoke at Harper Adams University on Thursday 15th October on ‘Agriculture: Five Great Challenges’.

Opening with the observation that necessity is the mother of invention Jeremy commented that farming only adapts when it has to do so.

Jeremy identified his five great challenges as:

  1. Volatility.  Farming’s response so far has been to spread unit costs by taking on more land.  Attempts have been made to spread risks as well, but farming risks are increasingly connected.  Cost leadership is the answer, but ‘costs are like daisies’ – you cut them down and they grow up again.  Some farmers have responded effectively by moving further down the supply chain, for example the potato grower who now supplies chips to take aways.
  2. Output/acre ~ value/acre: We are generally growing low value commodity crops and with this we are seeing an inexorable shift to domination by combinable crops, wheat in particular.  The number of potato growers is predicted to drop from 2,000 to 1,000 over 10 years.  On the other hand, high value output enterprises are starting to appear.  For example vineyards in the south of England, and orchards.
  3. Resources: capital has been readily available at very modest cost, but the rising challenge will be the repayment of the capital itself rather than the servicing charges.  There are 60,000 farms which keep only one person in work.  Employed labour is concentrated in the pig, poultry, horticulture and dairy sectors and many of these employees come from abroad.  There are gaps in the age structure of farmers and it will be a continuing challenge to recruit and retain skilled labour.  Foreign workers are no longer confined to handwork in the fields but are steadily moving up the value chain – without its input we would not be able to sustain much of the higher value cropping leaving farmers with little choice but to revert to monocultural wheat.  Soil health and the resilience of natural capital is also a key part of the resource challenge.  We need to be able to put the right values on the health of soil.  This also draws in the value of water, and abstraction rights for irrigation in particular.
  4. Science and productivity: There has not been much growth in productivity since the 1980’s yet we know that precision farming can increase yields.  There needs to be spare capacity in management in order to make time to consider the possibilities and implement new approaches.  Our increasing reliance on data raises questions about its ownership, for example at the end of tenancies, from one farmer to another, from contractor to farmer.  Actually making effective use of all the data and technology now at the farmer’s disposal is also a large part of this challenge.  Modern machines have enormous technical capacity, but in practice little of what is available might actually be used.
  5. Progression: Flexibility must be the watchword in considering progression.  New entrants need not be young.  Sideways entrants from other sectors can bring just as much and more.  The wonderful smallholding opportunity for the 25 year old can be prison for the same 40 year old.  The industry is dominated by family businesses, 90% of farm employers and 30% can trace their farming origins to before 1900.  Increasingly we may see 90 year olds leaving farms to 70 year olds.

We cannot be the world’s cheapest producers, it is therefore essential that we focus on high input and high output farming with a long term view to ensuring the health of the basic resources on which farming and much else depends.

What do you think of Jeremy’s Five Challenges for Farming?  Here’s the video if you would like to see more:

Source: Agriculture: Five Great Challenges by Jeremy Moody

This video was filmed at Harper Adams University on 15 October 2015 in front of a live audience of students and staff in the Weston Lecture Theatre

Cooperative Group to exit farming – look out for cheaper land?

Cooperative Group has announced that it is planning to withdraw from its farming business.  The precise wording of the announcement is interesting because it does not say that the Coop is going to sell its farms.  What it does say is, “The Co-operative Group has decided that its Farms are non-core and has started a process that is expected to lead to a sale of the business”.  On the face of it this could mean a simple sell-off of the farms.  But dig a little deeper and it might mean something else.  A contract farming arrangement with one of the bigger farming companies perhaps?  A series of tenancies or other joint ventures?  Management buy outs?

However the catalyst for this move has been the disastrous losses built up by the Cooperative Bank, standing at £2 billion plus according to the BBC’s Robert Peston.  So it seems likely that the need for cash must be an attractive part of the sale.

According to the same BBC report the Coop farms 17,200 hectares (42,500 acres), mainly growing cereals and fruit.  Only 2% of its produce goes to its retail stores, and Coop Farms got out of milking many years ago.  Despite today’s announcement the Coop Farms website is still advertising the agricultural apprentice scheme for which it was lauded last autumn.

So what might all this land be worth?   Continue reading “Cooperative Group to exit farming – look out for cheaper land?”

Prospects for agricultural markets and income in the EU 2013 – 2023

Agricultural income growth will have to rely on restructuring in the next 10 years, rather than growth in commodity prices. This is a key conclusion from the European Commission Report, Prospects for Agricultural Markets and Income in the EU 2013-2023, issued this week.

At farm level, what does this mean for UK farmers?  ‘Firm’ commodity prices are predicted.  This is at least a positive outlook compared with the prospect of falling prices, but it doesn’t offer much prospect for income growth on the farm.  As ever, farmers will continue to be at the mercy of market and natural forces.

But the report does say that ‘restructuring’ will offer opportunities for income growth.  This means yet another long hard look at labour inputs (already well stretched on many farms), continuing attention to detailed management and inputs in order to achieve higher net margins.  There is still a big gap between the best and the rest in farm incomes.  Although the farmers who make up the top 10% every year tends to be a floating population there is nevertheless a great deal that many farmers can do to close this gap.  Fertiliser and fuel inputs also need careful attention given their relationship to the price of crude oil.

If ‘restructuring’ points to the need for new kit, the next year or so may be the best time to buy with capital allowances for Income Tax set at very generous levels until January 2015.

The agricultural economic outlook also means that farmers must continue to look at other options for their assets.  Will the next 10 years see the real emergence of opportunities to profit from natural capital, by getting involved in carbon storage, water management, biodiversity offsetting or any of the other opportunities which are starting to open up in this area?

Key factors identified in the EC report include:

  • Commodity prices stay firm given low productivity growth, growing markets for biofuels and overall global food demand;
  • In the arable sector, biofuels will be the subject of the most dynamic demand factors.  By 2020 biofuel is expected to make up 8.5% of liquid transport fuel, with yield growth expected of 0.6% on average;
  • The maize and wheat area is therefore expected to grow;
  • Isoglucose is expected increasingly to take the place of sugar in processed foods – although no mention is made of the obesity crisis also in the news this week;
  • 2013 saw the lowest meat consumption for eleven years in the EU, at 64.7 kg/head.  It’s expected to be up to 66.1kg by 2023;
  • Beef production is expected to drop, while pigment production is expected to rise from 2014 onwards (but from low levels given the impact of recent welfare reforms);
  • Dairy expansion is expected to be restrained by environmental factors, with prices expected to stay firm but not spectacular;
  • The agricultural workforce is expected to shrink, and to see a widening income gap.

Key risk factors identified in the report include:

  • The success or otherwise of the African Green Revolution;
  • Higher prices for compound feeds;
  • Crude oil prices;
  • Euro/dollar exchange rate;
  • The possibility of a sudden drop in growth coupled with currency depreciation for a major exporting country like Brazil

This highlights a few key indicators that farm businesses should watch carefully.

I was asked yesterday whether farmers should take reports like this seriously.  Not to the extent of reading all 130 plus pages, but the headlines do point to some key issues which are worth following in the next 10 years.

For other coverage of the report, see:

http://www.fwi.co.uk/articles/17/01/2014/142865/eu-forecasts-10-years-of-firm-prices-for-farmers.htm [Farmers Weekly, accessed 18 January 2014]

http://www.euractiv.com/cap/farm-produce-prices-remain-stabl-news-532759 %5BEuropean News website, accessed 17 January 2014]

http://www.globalmeatnews.com/Industry-Markets/EU-economist-predicts-fall-in-meat-consumption [Global meat news, accessed 17 January 2014]

CAP: Agric Fundamentalists v Enviro Fundamentalists – some inconvenient points

Decision week for Defra Secretary Owen Paterson.  He is due to announce the ‘modulation’ rate for England by the end of the week.  Will it be 9% as the NFU wants, or 15% as the RSPB demands?  Modulation is EU-speak for the amount of farming support that is diverted (modulated) into more general rural development and environmental schemes.  So the more money that is modulated, the less the direct farm payments through the Basic Farm Payment which will soon replace the Single Farm Payment.  The BBC provides some of the background here.

Last weekend saw a crescendo of lobbying on the issue, with the RSPB taking out full page national newspaper advertisements and the NFU writing to all MPs.  Some of the mood of the debate is caught in Mark Avery’s Sunday blog: all households will have to pay £400 to support farmers; this is nothing more than a payment for owning land and farming it (whither tenant farmers?).  On the other hand the NFU whinges that German farmers are only subject to modulation rates of 4.5%, French farmers 3% and the proposed Scottish rate is 9.5%.  This will hurt competitiveness, says the NFU, and disadvantage English farmers.

The environment lobby makes much of the ‘value’ that we get for CAP payments.  The more money that goes to Pillar II (EU-speak for the budget that pays for environmental and social goodies), the better. But farmers prefer Pillar I (EU-speak for the budget that pays for direct farm support payments) because that relates directly to the land they farm and how they farm it – and this can be defended strongly on grounds of food security (will you starve or me?).

But of course we are dealing with public policy here, and the reality is more complex that the advocates of Pillar I and II would like us to accept.  The new direct farm payments come with more environmental strings attached – crop diversification and ecological focus areas for example.  And more of the money is moved uphill – where it is desperately needed because much of upland farming is economically marginal at best – at the (moderate) expense of lowland areas.  Whatever Pillar II funding we are left with, will be far more focussed than previously – a better deal on the 35% of rural land which will benefit compared with the previous 70%?  Perhaps so if you are in the lucky areas; perhaps not otherwise – although tougher conditions on the Pillar I funding may make up the difference in some lowland areas.

The RSPB and others have set out their case for the ‘value’ we receive in return for our £400 per household.  This is a compelling and attractive case, immediately attractive to anybody who pays tax.  Given the propensity of Avery and others to dismiss the CAP payments as a mere subsidy on land ownership and farming, I have been pondering what we do get for the money we spend on farm support.

This is an incredibly complex question once you factor in food security and social justice.  To take some dairy figures, our consumption of milk products works out as follows:

Taking our daily consumption of fresh milk, butter, yogurt, cream, dairy desserts we on average consume about 4 litres of raw milk a week.  That’s a little over 200 litres a year.  With an average dairy cow now producing 7,327 litres a year, that means each cow is supporting 36 people.  This typical cow requires 0.5 ha  of land a year, and lives in an average herd of 125 cows.  So the average herd is providing dairy produce for 4,500 people.  At a direct CAP Single Farm payment cost of just over £200/ha, this equates to a cost per consumer supported with dairy products of just under £3.00/year (1).  Doesn’t seem much, but let’s cut the CAP farming support payments altogether.   What happens next?

There is little doubt that the main buyers of milk from farmers have an excellent idea of the costs of production – including the effects of farming subsidies – and set their prices accordingly.   Ergo – exit CAP, enter higher payments from the main buyers.  Despite the hyperbole to the contrary, the main farm produce buyers have no interest in the financial failure of their principal suppliers.  So prices are adjusted accordingly to make it worthwhile – but only just so for better than average producers – to continue to supply milk.  In compensation retail prices increase – for everybody.

So if you are hard up, milk has just gone up and you won’t save much tax if you weren’t paying any or much tax anyway.  But if you are better off milk, yogurt, cheese etc has also gone up, but the CAP isn’t costing you so much through your tax bill.  That’s to say that another element of redistribute taxation has been lost.

Meanwhile at lower rates of modulation fewer farmers are encouraged (forced?) to look at the financial effiency of their operation.  At the recent LEAF conference, Martin Wilksinson (HSBC Head of Agriculture) made the point that many farmers could more than make up their CAP losses with improved technical and financial effiency.  This is one of the real challenges to the farming industry: to move more farmers to the standards of the best.  England was the first region in the UK to move to Single Farm Payments based on the same average payment, away from a payment based on historic payments.  Wales and Scotland have been slower to move in this direction, and there seems a compelling case for England being better prepared for this round of CAP reform as a result.  One fear for the environmental lobby might be the real danger that some of the best lowland farmers may move away from CAP support altogether, joining those sections of the farming industry which have never had it anyway (eg pigs and poultry).

Meanwhile farmers need to promote the value we get from Pillar I payments by stressing any benefits they provide to the rest of the country as consumers and taxpayers.  For example, how many people is your farm feeding?  And at what cost in public support?  Will Santa be coming early for the farming lobby or the environment lobby?

-oOo-

Footnote 1: These calculations were surprisingly hard to source.  The DairyCo website provides daily consumption figures, and the average herd size and milk yield are available from Defra statistics.  DairyCo also provides a diagram showing how the UK’s milk supply is utilised.  My approach was to take the daily consumption of the dairy products listed (a list which is not complete) and work out how much raw milk is needed for each product, eg about 20 litres for 1 kg of butter; 10 litres for 1 kg of cheese.  This ignores some of the complexities of dairy processing, for example milk from which cream has been separated may reappear as another milk product and so on.  Some arithmetic followed based around stocking rates (0.5 ha/cow), total production/consumption figures and lowland Single Farm Payment Rates per hectare in the last year or two.  In short, lots of assumptions; lots of scope for error – but if anybody can highlight any errors or better still existing sources of information like this I would be delighted to know.

 

The Prince of Wales, Country Life and our countryside heritage

The Conversation is a website sponsored by several universities and others, with the aim of combining academic rigour with journalistic flair. Environment Editor Michael Parker asked me to appraise Prince Charles’ editorial in the Country Life, and this is the article published by The Conversation on Friday 15 November 2013.

Charles: the future

king with retro-

vision

By Charles Cowap, Harper Adams University

In this week’s Country Life HRH Prince of Wales writes of the social and economic importance of farming. It is, he says:

the bedrock of our rural communities, making post offices, pubs, public transport and local health care absolutely vital to the production of our food and the protection of the landscapes we all benefit from in so many ways. This is why the countryside’s contribution to the national good has to be cherished and sustained. Without it, we will all be very much the poorer.

Elsewhere in his editorial HRH writes of the British countryside as the backbone of our national identity. Setting aside for a moment just what the 21st century British identity might be, what about the many generations of seafaring, war, empire, trade, or the industrial revolution? We need only go back to 1701 to see Daniel Defoe’s characterisation of “The True Englishman” in his typically satirical way.

HRH identifies several champions or “heroes” of the countryside, and what an interesting and in some ways inspiring group they are. But heroes? Have they unflinchingly stepped forward to meet terror, risking all for their peers? And can we really say that using helicopters to ferry in material for dry stone walls is a sustainable way to manage the countryside? Here are a few others who we might also recognise for championing the countryside:

  • WG Hoskins, 1908–1922, who taught us to understand the countryside, not least through his The Making of the English Landscape.
  • Octavia Hill, Hardwicke Rawnsley, and Robert Hunter, founders of the National Trust.
  • Kenneth Watkins, founder of the Woodland Trust.
  • Countless agricultural pioneers and innovators including the likes of Bobby Boutflour who did so much to revolutionise dairy farming and cattle nutrition.

Who would be on your list?

HRH rightly recognises the vital role farmers have in feeding us and as custodians of the countryside. But there is a contradiction when he goes on to lament the decline in genetic diversity in livestock, the deteriorating condition of soil and the short herd life of some cows. The Irish potato famines are blamed on lack of genetic diversity with no mention of good rotational practice and other vital aspects of crop husbandry. Can this be a description of the “best farmers in the world” as Prince Charles says?

Contrast this with the views expressed by Allan Wilkinson, Chief Agricultural Adviser to HSBC at the Linking Environment and Farming Conference (LEAF) this month. Wilkinson noted that the performance gap between the best farmers and the rest has always been large – it is now enormous. Wilkinson’s menu for success included attention to detail, good up-to-date knowledge, personal development, looking for ways to collaborate, recognising and respecting the competition.

Price pressure

Prince Charles makes the point that the “big retailers and their shareholders do so much better out of the deal” than the farmers they buy from. He also laments the enormous waste of food in the UK every year. Perhaps some of these retailers understand farming and consumers rather more than we recognise. Increasingly we see the big supermarket groups working with preferred groups of suppliers. During the recent milk price crisis, Tesco was recognised for being more supportive of its producers. In addition Tesco has also just produced its own analysis which revealed the waste of 30,000 tonnes in the first six months of 2013, a vast tonnage lost along the supply chain “from farm to fork”. Losses start in the field, and continue right through to the final consumer.

Waste is not the only problem with food: overconsumption leads to health problems, as are changing patterns of consumption in developing countries. But while many have plenty to eat we have also seen the rapid growth of the Food Bank movement in response to a shameful economic and social need. The Trussell Trust has seen its work triple. It is now rumoured that the publication of Defra research completed in the summer is being suppressed because it links the boom in food bank demand with welfare reforms. Perhaps our list of heroes needs to include Carol and Paddy Henderson for establishing the Trussell Trust in 1997 (named after Carol’s mother whose legacy made it possible).

Like much of what HRH has written about the countryside and farming, there is little to grasp in the way of a broad view of the future of the countryside, much less how to get to that future. The countryside as romantic idyll certainly seems central to his view of the countryside, yet how will that idyll be maintained?

Investing in the countryside, but where?

There are some surprising omissions from Country Life’s editorial. For example, the government is currently consulting on the implementation of the latest changes to the Common Agricultural Policy (CAP). Here is something which really does shape the countryside, and Defra has given us 28 days to respond to its consultation exercise.

Should we move the remaining money “up the hill” to support the beleaguered upland farmers mentioned by Prince Charles? HSBC’s Wilkinson and Tesco would both probably tell us that there is plenty more that the lowland farmers can do for themselves to improve profitability and farming sustainability. There is a strong case for diverting more of the public money to the marginal farming areas – not to support agriculture as such, but to maintain its value in supporting the rest of the industry “down the hill”, and for the numerous environmental and social benefits it can bring us all.

It is a shame that HRH does not seem to tackle this central issue of the extent to which public money should continue to support farming, what value we get in return for it, and the considerable amount of work which is currently underway looking at how we can reflect the much wider value of nature in the management of natural capital and the “purchase” of natural benefits from ecosystem services. All vital considerations in establishing a rural vision which builds on the best of a rural idyll.

Charles Cowap is a member of the Royal Institution of Chartered Surveyors, the Central Association of Agricultural Valuers, and non-executive Director of Management Development Services Ltd. He works as a rural specialist and land consultant for various companies and on various projects developing ecosystem service approaches, and providing training.

The Conversation

This article was originally published at The Conversation.
Read the original article.