Annual Rural Tax Book now available for 2011/12 taxes

CONCISE RURAL TAXATION (formerly TAXATION FOR STUDENTS OF RURAL LAND MANAGEMENT) is an annual publication, which now commands a wide following amongst rural chartered surveyors, land managers, agricultural valuers and those studying for the profession.  The Order form is available from:

http://dl.dropbox.com/u/26577824/Taxbook%20Flyer%202011.pdf

or by clicking this link: Taxbook Order Form

Or a copy can be purchased by simply sending a cheque for £20, payable to Harper Adams University College, addressed to:

Rita Wilkinson, Harper Adams University College, Newport, Shropshire TF10 8NB

There is a special discounted rate for students, RICS APC candidates and CAAV exam candidates of £15.

CONCISE RURAL TAXATION originated as a series of notes for second year students on the BSc Honours Degree in Rural Enterprise and Land Management at Harper Adams University College, to accompany their lectures and tutorials.  Over the years the original series of notes has grown and developed, and more and more former students and others have asked to be able to buy an up-to-date copy as they have prepared for the professional examinations of the Royal Institution of Chartered Surveyors, and the Central Association of Agricultural Valuers.  This year’s change of title reflects the broader interest in this annual rural tax update.  The following taxes are covered:

• Income Tax, including Business Profits, Annual Investment Allowance, new treatment of cars based on exhaust emissions, the herd basis and valuations for income tax purposes, profit averaging for farmers, loss relief and next year’s further changes to Capital Allowances with an extended section on Short Life Asset treatment.
• Capital Gains Tax – including Entrepreneurs’ Relief and the two sets of changes in 2010
• Inheritance Tax
• Trusts and Settlements – including Mainstream Trusts under the Finance Act 2006
• Value Added Tax, farming and the rural estate, partial exemption, the de minimis rules and the introduction of alternative de minimis tests in 2010
• A chapter deals with a number of specific tax issues for rural land managers, including valuations, land compensation and taxation, the principal residence exemption from CGT, Single Payment Scheme, Pre-Owned Asset Tax, lease premiums, SDLT and the tax implications of letting land.   New for this year: the latest treatment of Furnished Holiday Lettings.
• An introductory chapter also deals with the administration of national taxation in the United Kingdom and the final chapter highlights reliable sources of tax information on the internet.

120 pages
Published October 2011

Tax: Make the most of farm machinery claims while you can

Businesses can claim an annual investment allowance of £100,000 for plant and machinery.   This means that if machinery up to this amount is purchased, the entire cost can be set against tax in the year of purchase.  Any amount over £100,000 is however, restricted to the annual writing down allowance of 20%.   Big changes take effect next April which should prompt careful planning now.

Two changes need attention.  First the £100,000 limit on claiming full expenditure in the year drops to £25,000 from April 2012.  So bring forward any planned expenditure on plant and machinery if that would help to minimise the tax bill without upsetting other considerations of cash flow and finance.

Secondly the Budget introduced a rather technical amendment concerning what are called ‘short life assets’.   The maximum ‘life’ of a short life asset is to increase from 4 years to 8 years as of this April.  This could be a good way to accelerate claims for allowances on big-ticket items like large tractors, combine and other harvesters.

 The general idea of short life assets is this.  The Writing Down Allowances on Plant and Machinery work by allowing you to claim 20% of the ‘reducing balance’, ie how much was left on account after last year’s claim.  Mathematically this means that after four years the cost of about 59% of an asset has been claimed against tax, and after eight years about 83%. 

The balance stays in a ‘pool’ with the other plant and machinery, the total balance slowly reducing from year to year – but never quite arriving at a final value of zero.  Short-life treatment enables you to avoid this tailing depreciation effect.  If say a machine is bought for £100,000 (the annual investment allowance having been used up on other purchases) and sold after three years, the total tax expenditure claimed will be about £48,800 by then, leaving a balance of about £51,200 against future claims.  If at the end of the third year the machine is sold for only £40,000 the difference of the written down value and the sale price, ie £11,200, is claimed as a final allowance against tax so that the full depreciation on the machine has been claimed over the period of its ownership. 

Before this April it was only possible to use the Short Life treatment for up to four years, but this period has now been extended to eight years.  At current write down rates of 20% pa on an outlay of £100,000, about £41,000 of the original purchase price remains unclaimed after 4 years and about £17,000 after 8 years.  This compares unfavourably with the previous allowance of 25% pa, where the respective figures would be £32,000 and £10,000.  So it might make sense to look at short life asset treatment for some of your more expensive, rapidly depreciating assets where they are held for periods of less than eight years.

Do beware however, the sting in this allowance’s tail.  A balancing charge can arise to tax where the asset is sold for more than its written down value, so it will pay to take a careful look at second hand prices when deciding on which route to follow.

An adapted version of this article first appeared in Barbers Rural Newsletter, Spring 2011 edition, (Copyright Charles Cowap)

Budget – the rural bits

It could have been better; it could have been worse.  Here’s a round up of the relevant parts of the Budget for rural interests:

  • One penny off fuel duty and the introduction of a Fair Fuel Stabiliser which transfers some of the tax burden onto the oil companies and should reduce volatility in prices to some extent;
  • CGT Entrepreneurs’ Relief goes up to £10 million from £5 million.  This will help those selling more substantial assets at the end of a successful business.  There may therefore be some motivational benefit, and it may help with succession planning.  Beyond that it’s a good business headline which in reality probably does not do a great deal to help existing businesses as they go about their day to day activities;
  • Capital Allowances for Short Life Assets.  This is a somewhat technical measure.  Currently short life assets are defined as ones with an expected life in the business before resale or scrapping of 4 years.  Capital Allowances are claimed in the normal way (20% a year), and when the asset is sold any remaining balance over the sale price is then claimed.  This is better than the general pooling arrangements used for most plant and machinery.  The Budget extends the period for this treatment to 8 years and this could be a useful measure for substantial bits of kit on farms and estates.
  • However, no changes to the Initial Investment Allowance.  This would have been a more useful measure for a lot of rural businesses as the allowance goes down to only £25,000 next year (£100,000 now!).  A disappointment as the maintenance of this allowance, plus the ability to average claims over more than one year, was on our wish list for the budget.  It had also been recommended by the recent Tax Simplification Report.
  • The introduction of 21 Enterprise Zones with 100% rate relief for up to 5 years is not likely to cause much excitement in the shires, but the extension by another year of the Small Business Rate Relief holiday, until September 2012, will be helpful for some.
  • For rural employees who do a lot of travelling on business, the increase of the tax free mileage rate from 40p to 45p is good news, and overdue.
  • Modest reductions in Corporation Tax will no doubt be welcome to those rural businesses that are structured in this way, but the fact remains that many businesses continue as sole traders, partnerships or LLPs, and for good  reason.  This change therefore just increases the differential between trading as a limited company, and the rest, and may increase the pressure to change trading status for tax reasons.  Never a good starting point for fundamental questions of  business structure and strategy.  If anything, this goes in the opposite direction from that recommended in the Tax Simplification Report.
  • CGT Exemption goes up to £10,600 in line with indexation, but all these allowances will need to be carefully watched in the future as they are now going to be linked to the Consumer Price Index rather than the RPI.  This apparently innocuous change will mean that they rise more slowly in future.  See for example, the recent findings by PWC about ‘real world’ inflation.
  • Inheritance Tax Thresholds are stuck where they are until 2015/16 and then they too will be indexed against CPI rather than RPI.  Meanwhile, however the Budget announced a special benefit for estates that make substantial donations on death to charity.  Where at least 10% of an estate is signed over to a charity on death, the rate of IHT on the rest will be cut from 40 to 36%.  So this might be helpful to some of the rural charities, but it won’t come into effect until 6 April 2012 and more consultation is to follow.
  • One highly technical measure for CGT concerns Single Payment Scheme entitlements.  Strictly these do not currently qualify for Rollover Relief because the tax legislation refers to a 2003 EU Directive which was replaced in 2009.  This is to be corrected.
  • There is also to be consultation on Capital Allowances on generating equipment for renewable energy, Feed in Tariffs etc, where there is some confusion over the treatment of different types of asset.
  • The Rural Fuel Duty Rebate, of 5p/litre for the more remote parts of Scotland goes forward with a formal application to the EC for permission.
  • A new scheme for England to offer 10,000 first time buyers an equity investment of 20% towards the cost of a first home.  This is intended to help first time buyers struggling to save enough for a deposit and is to be funded jointly by house builders and government.  Does this mean this will be restricted to new-build only?
  • Beer goes up 4p and spirits 54p/bottle; wine 15p – not good news in the village pub but at least driving home sober has become more affordable with the reduction in fuel duty.
  • Road tax goes up by the rate of inflation, but HGV duty is frozen at current levels – good news for rural hauliers, especially taken with the fuel duty cut.
  • Rates round up: VAT Threshold up to £73,000 from £70,000; Income Tax Allowances up from £6,475, to £7,475 and £8,105 from 2011 and 2012 respectively.  Basic rate limit however drops from £37,400 to £35,000 and £34,730 from 2011 and 2012 respectively.  Meanwhile the government is to look more closely at the recent proposals to simplify and align Income Tax and National Insurance.
  • The much heralded planning reforms seem to amount to a presumption in favour of sustainable development being permitted wherever possible.  Does this mean goodbye to the ‘plan led’ planning system?  Who knows, judging by yesterday’s announcement.  Ian Butter has offered a cogent early analysis.

On balance then, it probably won’t do too much harm and some of it will be welcome for rural businesses.  But as ever, it could have done more particularly to help out with capital expenditure in smaller rural businesses.