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Replies to Queries - 4 - Farming troubles

11 April 2001
Issue: 3802 / Categories:

Those with farming clients will need to be ready to advise on the tax implications of any compensation which might be forthcoming in relation to the current Foot and Mouth disease problems.

Would I be correct in assuming that the compensation has the same tax treatment as if the relevant animals had been disposed of in the marketplace?

Those with farming clients will need to be ready to advise on the tax implications of any compensation which might be forthcoming in relation to the current Foot and Mouth disease problems.

Would I be correct in assuming that the compensation has the same tax treatment as if the relevant animals had been disposed of in the marketplace?

No doubt the continuing problems in the farming industry will lead to more farmers contemplating alternative uses for their land, such as theme parks and children's zoos. What would be the treatment of farm losses brought forward in such cases? Is there any means by which those losses can be carried forward to receive relief against alternative income in the future?

A further point which arises concerns capital allowances for agricultural buildings and farm machinery. What briefly is the treatment here, when farming ceases and an alternative business commences?

(Query T15,787) – Fred Parsnip.

Part one of the query relates to the tax principle applying to compensation received for animals slaughtered. Firstly, a reminder that in the present epidemic, compensation can be either under the cull of infected animals or a cull for animal welfare reasons. The amount of the compensation will differ, being lower under the latter section, but the tax treatment will be the same.

The first step is to identify whether or not the herd basis applies. If so, then the rules under the relevant legislation operate unchanged by the special circumstances causing the reduction in the herd. The legislation can be found at section 97, Taxes Act 1988 and the detail is described in Schedule 5. Bear in mind that any increase in the herd within five years results in a clawback of the tax relief. Strictly, the legislation refers to a twelve-monthly basis to review any change in stock numbers, not to the financial year. However, this does at least give a tax cashflow advantage, as any rebuild of a herd or flock hoped for by the farmer does not have to be taxed until it has actually happened.

A new opportunity to elect for the herd basis to apply is also offered to those farmers not already on the scheme, where the herd or flock has been subject to compulsory slaughter and subsequently re-established by the farmer.

If the herd basis does not apply, Extra-statutory Concession B11 states that any profit made through the compensation granted can be left out of account completely for the year when it was received and instead it would be taxed by being apportioned equally during the next three years. Profits are defined as being the difference between the compensation received and the book value of the relevant animals at the start of the year in question, or the cost if either they were purchased or they matured from home-bred stock during the year.

As far as losses are concerned, the treatment does not vary from the main legislation merely because of the cause for change. Therefore, unless the business remains essentially the same, prior losses will not be allowable in the future. It is a matter of perusal of the specific circumstances (and perhaps skilled presentation) to decide whether the new idea is merely a new enterprise within an existing business or whether it constitutes a change so radical that the old business is deemed to have been discontinued.

The treatment for capital allowances is again consistent with that of more normal circumstances for change. For plant and machinery, a balancing allowance or balancing charge would arise based upon the appropriate market value. The rules for connected persons would apply. The latter would also be relevant in that first year allowances would not be available to the new business.

The standard procedure for agricultural building allowances where the buildings are sold would be for the new owner to receive the allowance at the same rate as that which the vendor had obtained. It would be apportioned on a time basis in the year of disposal. Alternatively, if the proposed new business is to be non-agricultural, the owner could elect for a balancing allowance to apply at the point of the change. This election could also be made jointly by a vendor and a purchaser.

If it is a tenant farmer giving up the business and no consideration is received from an incoming tenant for a building where he had been entitled to agricultural buildings allowance, the landlord may continue the claim. – AM.

The tax treatment of compensation received in respect of the current Foot and Mouth disease problems depends on whether or not an election has been made for the herd basis to apply.

Where a herd basis election is in force, the animals in the herd are effectively treated as capital assets. The initial cost of the herd and additions to the herd is not deductible as a trading expense, and its value is not brought into account. A profit or loss on the compensation received within a 12-month period (without replacement) of the whole or a substantial part of the herd is similarly not brought into account. As a substantial part is normally accepted as 20 per cent or more, the compulsory slaughtering of animals – either because they have Foot and Mouth or they fall within an exclusion zone – will be covered by these rules. If, however, within five years of the compensation being received, a herd of the same class is, or begins to be, acquired the normal replacement provisions apply – the compensation receipts being treated as received at the time of the corresponding acquisition(s). If subsequently, however, the herd is replaced by animals of inferior quality, the transaction may not give rise to a greater trading receipt than the amount allowed as a deduction in respect of replacement animals.

The time limits for making an election for the herd basis to apply are strict and, normally, such an election can only be made when a business commences trading. Where, however, there is a compulsory slaughter of animals, a further opportunity to elect for the herd basis arises.

Where the herd basis election has not been made, special rules apply in respect of compensation received for compulsory slaughter. Any excess of the amount received over the book value or cost of animals may, by concession, be excluded from the year of receipt and treated, by equal instalments, as profits of the next three years. The profit on an animal born in the year of slaughter, which does not have a book value or cost price, is deemed to be 25 per cent of the compensation received.

Full details of the concession are contained in the Revenue Pamphlet IR1, B11. Examples for the arrangement for spreading can be found in the Revenue's Inspector's Manual at paragraph IM 2268a et seq.

In accordance with the provisions of section 385, Taxes Act 1988, losses may be carried forward (without time limit) and set off against the first following profits of the same business by the same owner. A number of cases have been heard on this subject over the years. It would appear from the information provided that changing the farming activities to a theme park or children's zoo would constitute a change of trade and, hence, losses would not be available to carry forward following the cessation of farming. 'Fred Parsnip' should, however, consider the various other loss relieving provisions in the Taxes Acts which could provide a route for the set-off of losses.

The change of use will have no effect on the entitlement to agricultural buildings allowance. If the conditions for claiming the allowance are satisfied when the expenditure is incurred, and the first use of the building is in a qualifying trade, the expenditure qualifies for writing-down allowances for the full 25-year writing-down period without regard to the use of the building in later years.

As far as the farm machinery is concerned, whether or not writing-down allowances will be available in the alternative trade will depend on whether the machinery continues to be used in the new trade. If so, the asset can be transferred to the new business at written down value. No first year allowances will be available on the machinery when the new trade commences. If it is not intended to use the machinery in the new trade, then the market value of the machinery must be incorporated in the final capital allowances computation of the farming trade, and balancing allowances/charges calculated as appropriate. – Carryduff.

Extracts from further replies received:

As far as capital allowances are concerned, the treatment of agricultural property and plant and machinery is different. For agricultural property the cessation of a trade is not a balancing event for the purposes of section 129, Capital Allowances Act 1990 so agricultural buildings allowance will continue to be available against income from a new trade. However, for plant and machinery, a balancing adjustment occurs where a trade ceases (ibid., section 24). – G.S.

On the question of utilising losses brought forward from a trade of farming, they are subject to the usual restriction in section 393(1), Taxes Act 1988 so that they can only be carried forward against profits of the same trade. At this stage, one has to consider what is the same trade and to answer this question one has to take a detour to consider the effect of section 53(2), Taxes Act 1988. This provides that a trade of farming shall include all different aspects of farming and so pig farming and growing wheat shall be treated as one trade for tax purposes. Farmland is defined in section 832(1), Taxes Act 1988 as being 'land in the United Kingdom wholly or mainly occupied for the purposes of husbandry … and "farming" shall be construed accordingly'. Husbandry is then defined in section 133(1), Capital Allowances Act 1990 as including 'any method of intensive rearing of livestock or fish on a commercial basis for the production of food for human consumption'.

From these definitions, it is evident that, say, breeding ostriches to sell for their meat would be farming, but the definitions would not encompass theme parks or zoos. Therefore if the previous trade of farming had ceased and one of those two trades had been commenced, the losses brought forward would be lost. If the trade of farming continues alongside the new trades, any ongoing losses from farming could be set against profits of the other trade in the same or preceding year by virtue of section 380(1) and 380(2), Taxes Act 1988. – Hodgy.

Issue: 3802 / Categories:
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