Budget 2014: Rural points

Nothing very obvious grabs the rural headlines in today’s budget other than the extension of CGT rollover relief to the new Basic Farm Payments.  This measure is backdated to 20 December 2013, the date the new payment entitlements were introduced.

The single most significant measure for most rural businesses will be the increase and extension of the Annual Investment Allowance.  Currently £250,000 a year this was due to revert to its former rate of £25,000 after December.  In a very welcome extension it is to be increased to £500,000 almost immediately (from April), and to be extended to 31 December 2015.  Complications which arise from straddling account year ends aside, this is most welcome for any farmer with serious investment plans in the next year or two.  The government reckons this will ‘cost’ £85 million in 2014-15 rising to £1,270 million in 2016/17.  However there will be a benefit to government from 2017-18 of £445 million over two years as annual writing down allowances are proportionately reduced.

The property world will also be interested in the extension of the special taxes which now apply to dwellings owned by ‘non-natural persons’ – generally meaning valuable London property held by companies, latterly to avoid SDLT on sales and transfers.  The threshold for 15% SDLT is reduced to £500,000 from £2 million immediately – although there are savings for those unfortunates who have exchanged contracts but not yet completed.  The threshold for ‘ATED’ – Annual Tax on Enveloped Dwellings – will also start to fall from 2015, to £1 million in the first year incurring an annual ATED charge of £7,000 and the following year to £500,000, leading to an annual ATED charge of £3,500.

Environmentalists will want to study the changes to the Carbon Price Floor.  The Carbon Price Support rate has been reduced to £18/tonne through to 2020.  It had been planned to raise it to £30 per tonne in 2009 prices by then.  However the EU Energy Trading Scheme has not worked well, and continuation at the current floor rate was seen as a threat to the competitiveness of the electricity generating industry.  This should take some pressure off electricity bills in the next few years (although marginally so in most cases).

Other more detailed points which may be relevant in the rural economy and to property include: Continue reading “Budget 2014: Rural points”

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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]

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)