Many new diversification initiatives have been launched in the past 18 months, often related to the threats or opportunities posed by the pandemic.
Farmers Weekly asked consultants for their tax and financial management tips for these new businesses.
If you’re looking to start a new business that is different from the rest of your farming business, setting up a separate bank account whether it’s part of the farming business or not can be helpful, says Iain McVicar, partner of the Farms and Estates team at the accountant Albert Goodman.
“This will help keep track of the money being spent and whether the company is making money.”
See also: Establishments that do not take into account the tax implications of diversification
The lower your initial investment, the lower your risk. “Therefore, if you have untested new business, keep your capital expenditures as low as possible,” advises McVicar.
“Buy second hand and finish and fix it first. Once you are certain that the business will be a success, you can invest with more confidence. “
If the new business involves significant risk, consider doing it with a limited liability company or a limited partnership.
This delimits the new company’s liabilities and protects the valuable land, buildings and farm holdings.
“If losses are to be expected from the new business, these can potentially be offset against agricultural profits, thereby reducing your tax burden. However, losses from a new business require shared ownership in order for the losses to be used, ”says McVicar.
For example, if an agricultural business partner is also a partner or sole proprietor of the new company, that person can offset losses from the new company against their share of the agricultural profit.
“Likewise, someone starting a new business who was previously employed can offset the new business’s losses against taxable income from employment in the previous year.
“This only applies to sole proprietorships and partnerships, including limited partnerships, but not to limited liability companies,” he advises.
Notes on VAT
Often one of the big considerations is whether to start a new business within an existing VAT-registered agricultural business or start a new business such as a sole proprietorship or some other partnership, says Nick Dee, partner at Hazlewoods.
“If the new company is taxable supplies to non-VAT customers such as furnished vacation rentals, camping, clay pigeon shooting, corn maze, etc., sales tax registration threshold to have a separate business so that sales tax does not have to be collected,” he says.
“This is particularly useful where there is little input tax on reimbursed costs.”
As a general rule, rental income is a tax-free service (no VAT to be charged), but the rental of buildings and containers for storage is a taxable service, as is the storage of caravans, the provision of parking spaces, vacation rentals, etc.
Mr Dee points out that each separate business, with its own accounting records and bank account, really needs to be separate from the main agricultural business that is subject to VAT. All transactions between the two must be made on market terms.
For example, if the diversification company that is not subject to VAT uses a tractor from the farm, the farm must charge a standard commercial rate plus VAT for this use.
“The non-refundable VAT on this would be an additional cost factor for the diversification business that should be budgeted for,” says Mr Dee. “Likewise, diversification should have its own share of overhead costs like telephones or, like the tractor, an administrative fee from agriculture.”
Paul Topham, a partner in auditor Azets, notes that the ability to reclaim input tax could be limited if the diversification activities are VAT exempt and that complex partial exemption rules may apply.
He suggests that one possible avenue in such cases is to publicize a formal VAT choice as a tax option that converts the supply to a standard tax rate to which the customary 20% VAT is applied but allows input tax reimbursement .
New bank accounts advisable, but can take time
Setting up a new commercial bank account can take longer than you think, warns Hazlewoods’ Nick Dee.
“While banks were providing Covid support loans like the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme, it was almost impossible to open a bank account unless you had an existing relationship as banks were very concerned about that Were at risk of fraud.
“It is still not easy as many banks still do not visit farms. If you’re looking for a new bank, setting up a new business account can take months. People often had to use a separate personal account on short notice.
“If you use your existing bank, a new account should be possible in weeks, but it may still take some time if a new person is involved in the new business.”
Keeping things straight
It is common for farming families to hold land under different names than those who run either the farming business or the diversified business. Keith Johnston, Senior Tax Manager at Accountant Armstrong Watson, advises ensuring that asset ownership is clearly documented to avoid tax and legal problems later.
A family business that occupies part of the business for a new company should also be treated in the same way as a third party.
“That includes asking for a rent and making sure it’s paid on normal terms,” says Johnston.
“If the new company has employees, a new PAYE system is also required, which is separate from operations. Similarly, a separate pension system is required to comply with the automatic enrollment laws. “
HMRC is promoting the Making Tax Digital, which requires all taxpayers to keep digital records and to submit them to HMRC on a regular basis.
Johnston advises those starting a diversified business to get started with digital records.
VAT and high set-up costs
If setup costs are high and sales tax is a big element, consider getting a sales tax registration or looking at a company that does some work and then leases assets to the new company.
With partial exemption rules, caution is advised if an element of the income from commercial transactions from tax-exempt supplies, such as. B. Rent, originates.
Leveraging assets by renting them out is VAT-free income and may limit the amount of sales tax you can claim on overheads.
If you want to generate rental income, you should seek advice.
Joanne Thomlinson, Dodd & Co
Cash, bookings, payments and records
The declining use of cash means that many diversification companies have to accept card payments, emphasizes Joanne Thomlinson, partner at auditor Dodd & Co.
“It’s now a lot cheaper and easier with apps like Sumup and iZettle, but you usually need a smartphone or tablet.
“The downside is that you need access to Wi-Fi or data, which is often a problem in rural areas,” says Ms. Thomlinson.
“There are also websites that list availabilities, take bookings and take payments. There are far more options available today than there used to be, so do your research before choosing someone to work with.
“With newer cloud-based accounting software such as Xero and Quickbooks, it should be possible to retrieve sales data from booking systems, which should make bookkeeping easier.”
Longer term considerations
One of the greatest tax benefits of agriculture is that qualified property is 100% relieved of inheritance tax (IHT) through Agricultural Property Relief (APR) in the event of death.
Diversification can prevent this relief from being applied, although in some cases a Business Ownership Relief (BPR) may be available instead, which would provide between 50% and 100% relief.
The rules in this area are complex and care must be taken to ensure the conditions are met, warns Mr Topham.
Depending on the level of income from the diversified activity, the existing farm may not be considered “primarily farm” by HMRC without careful planning, jeopardizing valuable benefits such as the APR.
While the new business may bring cash and new profits, if land and buildings are developed or remodeled to house the new business, consider the possibility that it may devalue the farmhouse or farm itself rather than the asset raise.
Company, sole proprietorship or partnership?
A limited liability company taxes its profits at corporate income tax rates (currently 19%, but starting from the 1st for higher taxpayers.
A limited liability company can claim the new 130% super deduction for qualifying expenses for machinery and equipment. A partnership can be entitled to 100% capital allowances.
Separate accounts, even if one company
Regardless of whether a diversified activity is run through a separate operation or as part of the operation, it is always wise to keep the accounts separate, advises Mr Topham. This avoids the “pool” of income and expenses, which would make it difficult to determine the true performance of each division.
“This is all the more important if the company has chosen a different structure than the company.
“The diversified company may have different partners or shareholders in the farm and as such the profits would have to be identified and correctly allocated.”