With the farming industry undergoing mass reforms and increased pressures as the Basic Payment Scheme is phased out, the Chancellor’s latest Budget statement was eagerly awaited. In the end, the farming sector was largely overlooked, with the focus being on a new post -COVID economy of fiscal stability.
There were still a number of changes relevant to farmers and the rural economy:
- Increase in Annual Investment Allowance (AIA)
Having the right machinery and vehicles is a challenging cost for many farming businesses. AIA, which allows businesses to claim 100% tax relief on qualifying assets against taxable profit, was due to drop from its cap of £1m to £200,000 on 31 December 2021. The £1m allowance was originally only intended for two years, was extended for another year, and in this Budget has now been extended until 31 March 2023. This alignment with tax years will simplify the transition back to the (presumably) £200,000 cap on 31 March 2023.
Since 1 April 2021, many companies have been able to benefit from the 130% super-deduction on qualifying plant and machinery investments. However, this allowance is not available to unincorporated businesses or on second-hand kit, where instead AIA can be used to obtain the tax relief. The extension to the £1m allowance will therefore make a positive difference to many farming businesses.
2. New Green Investment Relief
In an effort to encourage the uptake of green technology, items such as solar panels will be exempt from business rates.
There have been calls for a reduction in VAT on these types of investments but this did not materialise. Given the upcoming COP26 meeting, there was very little in the way of green announcements regarding how we will meet the ambitious net-zero 2050 pledge – a particularly challenging target for farming businesses.
3. Business rates
One of the key areas that the Chancellor did address was business rates for those most affected by COVID-19. The change will see a reduction of 50% for businesses in certain groups relating to entertainment, hospitality and leisure.
This will be welcome news for many farming business who have diversified into farm shops, wedding venues, campsites and holiday lets. The relief is available up to a maximum of £110,000 for each business. This will come into effect in April 2022.
This is in addition to a 12-month holiday on increased rates for businesses investing in their properties.
4. Capital Gain Tax
Surprisingly there were no changes to the rates or allowances for Capital Gains Tax, however, the timelines for submitting information relating to sales of residential properties, previously within 30 days of the transaction being completed, is being extended immediately to 60 days. This is a much more achievable timescale allowing people time to seek correct advice and provide the information required.
With post-Brexit labour issues affecting the rural sector more than most, the increase in the National Living Wage to £9.50 per hour (a sizeable 6.6%), will put pressure on businesses in the future, when labour is already in short supply.
6. Fuel duty
Fuel is a large cost for many farming business. The expected increase after years of being held steady would have hit hard. However, the decision to freeze fuel duty will be well-received by many businesses experiencing high fuel costs.
7. Research and Development
The agricultural sector has an abundance of activity around innovation, new technology and efficiency. R&D tax credits are a tax relief designed to encourage spending on research and innovation. The Chancellor made much of encouraging research and development spending including an overhaul of the tax relief system.
Currently, the tax relief only applies to companies and as most farm businesses are partnerships, hopefully, some changes may be on the way.
8. Property Developer Tax
A new tax, called the ‘Building Safety Levy’ was confirmed to apply to property developers with profits over £25 million, at a rate of 4% from 1 April 2022. Although not affecting landowners directly let us hope the additional cost does not filter down to the landowner selling farmland to a property developer, in the form of a reduced price per acre.
9. Basis period reform for Making Tax Digital
Despite lobbying from many accounting bodies for the Government to drop its plans to move away from the basis period rules, the Budget confirmed that the proposed change will go ahead, but a year later than initially proposed. From 6 April 2024 all accounting year ends will be aligned to 5 April.
For businesses with an accounting date other than the tax year end (5 April), this could accelerate profits into an earlier tax year, increasing tax liabilities for the transition year. This may affect cashflow, particularly around 31 January 2025, when the balancing payment for 2023/24 is due.
To mitigate the cashflow impact, an election is proposed to spread any excess profits in the transition tax year over a period of up to five years.
The purpose of alignment is to assist self-employed businesses and landlords with business turnover above £10,000, who from 6 April 2024 will be required to report under MTD for Income Tax.
Further information on this will follow as the mechanism and implications are known.
What does the future hold?
The Budget was one of giving, but as we all know, following this mass give away, at some point the piggy bank will need to be refilled. Announcements have already been made about:
- The increase in Corporation Tax from 19% to 25% to take effect from 1 April 2023;
- A new Health and Social Care Levy of 1.25% from 6 April 2022, which will initially be collected in the form of additional National Insurance contributions from employees, employers and the self-employed;
- A25% increase in the rate of Income Tax on dividend income from April 2022.
Surprisingly there were no changes to Capital Gains Tax, Inheritance Tax or pensions as initially anticipated. However, it will be interesting to see what the Budget in March brings, especially following the Chancellor’s announcement that expenditure must be funded by either an increase in tax rates or from a growing economy. Hopefully, it will be the latter but it would still be sensible to enact any planning now before we enter a post-COVID tax regime.
Ellacotts can help with any queries you have on the latest changes. Please feel free to contact your usual Ellacotts contact who will happily talk through how these changes will affect your business and your family.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.