This year sees the end of the Basic
Payment Scheme (BPS) application process for
farming subsidies, as the government looks to link support for farming with
sustainability. The Sustainable Farming
Initiative (SFI) is already being phased in as part
of a variety of Environmental Land Management Schemes (ELMS).
An HMRC consultation about how
these new payments will be treated for taxation purposes has just closed, and
the Revenue now has a decisions to make
which will have a big impact on every many farming businesses.
The tax treatment of farming
subsidies under the Basic Payment Scheme was just that: basic. BPS payments were taxed as income in the
relevant period, appearing in the farming annual profit and loss account. In simple terms, the subsidy provided an
annual income at a fixed rate to support the farming businesses continuing to produce agricultural
goods.
However, the move towards ELMS not
only sees the replacement of the BPS subsidy with incentives for more
sustainable farming practices, but there will also be funding towards creation
of new habitats or returning farmland to its previous state.
These new schemes will inevitably
see arable farmland or livestock grazing land coming out of traditional
production and used to generate increases in biodiversity and carbon capture. This paradigm shift replaces the tried-and-tested
farm margin models with some unknowns (is this still
agriculture? Is the income revenue or capital?) which could act as a
barrier to some landowners making business decisions, and potentially missing
out on new, diversified income streams.
Despite suggestions
to equalise capital and income tax rates, government has maintained CGT
rates at lower rates than income tax. So on the expenditure side, capital
costs, especially in relation to land, are unlikely to attract the same levels
of tax relief, if any, as those going through the profit and loss account.
So this change in policy must be
backed up by clear and fair guidance on the accounting and tax treatment, so
that landowners can review the benefits of each scheme through a financial lens
as well as an environmental one and link their ongoing business plans to the
governments pursuit of ‘public monies for public goods’.
