The UK's pursuit to achieve 'Net Zero' Carbon emissions by 2050 is having a huge impact on farming and agriculture!
Net Zero has resulted in an industry shift that now places emphasis, combined with incentives, on the environmental impact of farmers' choices and decision making. This had resulted in moving away from the prior Basic Payment Scheme into new schemes that change the agricultural grants system. Some of these include:
In this blog post, we explore the above initiatives in more detail and explain the benefits, how they're accounted for and the potential tax challenges they could also present.
Sustainable Farming Incentive and Countryside Stewardship Scheme
The Sustainable Farming Incentive (SFI) aims to motivate farmers by providing incentives to set aside land from production and carry out specific actions. These can include creating field margins with wild bird mixtures. The goal is to designate less productive areas of the farm, such as inefficient corners of fields and wet lying areas, for such initiatives.
By dedicating land and adhering to the requirements of the SFI, your agricultural enterprise stands to gain a guaranteed income stream. This not only provides a financial cushion for less productive land but also shields it from the uncertainties of market fluctuations and competitive pressures that traditional farming practices can entail.
Of note however, the devil is as ever in the detail. There is a 25% limit on the total farm land that can be placed into a SFI agreements. The scheme is designed to ensure food production levels are maintained.
Agreements made with the Rural Payments Agency (RPA) vary in terms of length, but most usually fall within a 3-5 year timeframe. The amounts are paid in quarterly installments, starting in the fourth month after the start of the SFI agreement.
Basis Period reform means partnerships and sole traders now have to report their revenue and earnings in line with the tax year. This runs from 6 April to 5 April of the following calendar year.
Unfortunately the end of an SFI period may not always fall in line with end of your reporting period. Therefore, adjustments will have to be made so as to accrue (a forward provision), or defer the grant revenue, dependant on the end of the reporting period and the amount received to that date.
Also, grants of this nature are generally taxable, so this means they need to be recognised and accounted for in the correct reporting period. Basis period can get complicated so if you're unsure about the accounting treatment of grant revenue, then be sure to seek professional advice.
Agricultural Property Relief (APR) provides a potential break from exposure to Inheritance Tax (IHT) where land and related buildings that are occupied for the purposes of agriculture, are to be gifted to your beneficiaries.
Under the existing scope of APR, land within existing SFI agreements is unlikely to qualify for IHT relief. In the 2024 Spring Budget, it was announced that from 6 April 2025 the scope of APR would be extended to include land managed under an environmental agreement, such as SFI. Further clarity is yet to be provided by the government on a variety of grey areas that have been raised, so it's a case of watch this space for now.
The Farming Investment Fund (FIF) is a grant that is designed to improve productivity and profitability, the environment, and animal health and welfare on your farm. The grant works as a contribution towards capital investment.
There are various qualifying assets that farmers can obtain funding for in order to improve productivity, and in turn the quality of animal welfare. A specific grant is available for beef and dairy farmers to invest in new or improved calving housing.
We know of examples where this exact fund has also been used as part of investment in a new sheep handling system. This is to achieve increased efficiency in handling sheep for various needs. The new system reduces the timeframe in which the sheep are handled, thereby enabling them to return to grazing as soon as feasible.
The accounting treatment for a grant that is in relation to capital investment differs from those grants for normal business expenditure, such as the SFI. Firstly, the asset is recognised on the balance sheet of the business. That said, this will only be recognised at the cost to the business (cost less FIF grant) as opposed to the selling price.
Capital allowances can then be utilised on the amount incurred by the business and the asset then depreciates in line with your businesses policy. Capital allowances apply to expenditure on assets that are likely to have a lasting benefit of a year, or more. Examples include machinery purchases, property improvements, and also new agricultural buildings. The classification of the asset in question determines the allowance rate, and whether the claim applies to new assets only, or new and second-hand assets.
The impact of grants on your agricultural business can be complex and potentially confusing. Be sure to obtain professional advice to ensure these initiatives, and incentives, are properly accounted for. The right advisor will be able to help you navigate the legislation and rules to ensure any grants don't impact negatively on the various tax breaks and reliefs available to your business.
The content of this post was created on 22/07/2024.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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