Chartered accountants, Saffery Champness, has warned against rushing into diversification projects without careful planning.
Generating additional revenue through projects such as holiday accommodation, renewable energy schemes and woodland planting, can provide much needed revenue streams to support a farming business. However if these projects are not properly planned, there can be issues which can impact a company’s tax position.
Martyn Dobinson, partner at Saffery Champness and member of its Land and Rural Practice Group, said: “Proper advice should be sought at an early stage and the potential risks and issues of diversification projects should be explored at the outset, not only to assess a project’s viability, but also to assess the impact on other operations and any unintended tax consequences.
“Farm business income is generally taxed as trading income, whereas income from diversification projects could fall to be assessed as investment income. Many land and property-based businesses would not qualify as trading businesses, particularly where there are no additional services provided with the simple letting of the land or space, for example accommodation and renewable energy facilities operated by a third party. Such income would be taxed separately to that derived from the main farming trade and can therefore have implications for loss relief and averaging, for example.
“Where the project is one of investment, rather than trading, there can also be significant implications for Inheritance Tax reliefs. VAT is always an important consideration. Does the diversification project put land or property to a different use? Partial exemption rules and the impact of the project on the overall VAT recovery position will need to be considered.”
Other factors to be considered in the planning phase include whether the project has any potential public liability. If so, if there is adequate insurance cover in place, or is the risk such that it may be sensible to run the venture through a separate legal entity with the protection of limited liability, such as a company or limited liability partnership? Directors or members of such entities do still have legal responsibilities, but these structures can be useful to protect existing businesses from the increased risk posed by a new venture.
Also needing to be considered is whether a change in use of property will lead to an exposure to business rates where a property was previously exempt? What about tax relief for any initial capital investment, for example through capital allowances? Potential grant funding for the venture is another important consideration.