ON THE RIGHT TRACKAutumn/Winter 2017

Do It Yourself house build and VAT

Rollover Relief - Common pitfalls

Welcome to Sean Gorman and his team

Six often unused gift tips

On The Right Track • Autumn/Winter 2017

HELLO AND WELCOME TO OUR AUTUMN EDITION OF ON THE RIGHT TRACK, OUR BI-ANNUAL NEWSLETTER FOR THE FARMINGAND RURAL COMMUNITY. ANOTHER HARVEST HAS PASSED US BY AND AS WITHLIFE, EVERYTHING CHANGES AND NOTHING ISDIFFERENT.

We still do not know where we are with Brexitand yet it may well generate the greatestchanges to our industry for a number of yearsand we all need to be planning for thosechanges. In this newsletter we will exploreBrexit and where the industry thinks we areheading, whilst looking at the question ofmanagement and measurement; how can weunderstand the business better and whatvalue will it bring to the business.

We also have new faces to welcome at DykeYaxley. We were fortunate to have SeanGorman and his team from Gorman Evansjoin us this autumn. Sean brings a wealth ofexperience to the business and is well knownand respected in the area as an agriculturalexpert.

Our expanding agricultural team looks forward to working with you all in the futureand if we can be of any assistance, please donot hesitate to pick up the phone and call.Your business is always important to us,because it is important to you.

Kind RegardsMark Griffiths

WELCOME DO-IT-YOURSELF HOUSE BUILD AND VATIF YOU ARE THINKING OF BUILDING A NEW FARMHOUSE, IT MAY BE POSSIBLE TO MAKE A

CLAIM UNDER THE VAT DIY HOUSEBUILDERS SCHEME. NORMALLY ON PURCHASE OF A NEW

HOUSE FROM SAY A PROPERTY DEVELOPER, THERE IS A ZERO RATED SUPPLY AND THEREFORE

NO VAT IS CHARGED. THIS SCHEME TRIES TO PUT YOU IN THE SAME POSITION AND ALLOWS

YOU TO RECOVER THE VAT PAID ON BUILDING MATERIALS FROM HMRC.

To be eligible the farmhouse should be builtfrom scratch and not form part of an existingbuilding. It must be self contained and be foryou or your family to live/holiday in.

Farmers need to be aware of the impact restrictions of use may have. General planningconditions such as restricting the occupation ofthe house to agriculture will not affect the VAT relief. However, planning which prevents itsseparate disposal from the surrounding agricultural land and buildings will result in aclaim being denied.

The property must also not be for business purposes so furnished holiday lettings do notqualify under the scheme. Also the building of afarm worker’s cottage will not qualify but youmay be able to make a claim under your ownVAT registration. Be aware, that VAT incurred on:

Services such as architect or surveyor feescannot be reclaimed, if charged separately.Therefore, you may wish to consider a ‘designand build’ project which then results in onezero rated supply.

If using a builder/contractor, you must ensurethat they charge you the correct amount of VAT.If they charge you incorrectly, you will need torequest them to reissue the invoices as anyincorrect amount of VAT charged cannot beclaimed back from HMRC.

If you purchase the materials you will suffer VAT at 20%. It is therefore preferable, if using a builder/contractor for them to supply all materials as this will also be one zero rated supply.

You must make a claim within 3 months of thebuilding work being completed. The claim isvery detailed and all original invoices, planningpermission, plans and building regulation certificate are required.

A claim is also on an invoice basis, therefore no invoice, no repayment. Keeping accuraterecords as you go along is the key to a successful claim.

If you are converting a building then there areseparate rules.

If you would like any assistance in making a claim, get in touch…BEFORE the build commences.

MARK GRIFFITHS

Curtains, carpets, underlay, garden furniture,sheds and greenhouse costs are also excluded from a claim.

Construction of a garage can be included inthe claim provided it is constructed at thesame time as your home.

Plant, tools and equipment including planthire costs are denied.

Most electrical and gas appliances such asagas/cookers, washing machines, fridges andfreezers cannot be claimed.

MEASUREMENT AND MANAGEMENT –WHICH COMES FIRST?

MANY UK FARMERS WHO ARE ALSO RESIDENTIAL LANDLORDS ARE FEELING IT HAS BEEN A PERSONAL ATTACK FOLLOWING THE GOVERNMENT’S INTRODUCTION OF BOTH:

THERE IS AN OLD ADAGE THAT SAYS YOU CAN’T MANAGE WHAT YOU CAN’T MEASURE.

MEASUREMENT COMES IN TWO FORMS, PHYSICAL AND FINANCIAL. AS ACCOUNTANTS WE

ENCOURAGE FARMERS TO KEEP A CLOSE EYE ON THE MONEY COMING IN AND GOING OUT

OF THEIR BUSINESS.

PROPERTY BUSINESS -INCORPORATION ANYONE?

However, incorporation relief under S162TCGA 1992 is available if all the business istransferred in exchange wholly or partly forshares.

The relief allows the gain arising on the property transfer to be rolled over into thebase cost of the shares. Capital gains tax onlythen becomes due if and when the shares are sold. Careful consideration will need to be given to the Stamp Duty Land Tax implications.

Where a farmer’s residential property isactively managed with a high degree ofactivity, within the property, to quantify itas a ’business’, then if transferred to acompany, Newco, there will be a CGTcharge at 28% based on the propertiesmarket value due to the ‘connected’ partyrules.

The restriction on loan interest relief and

the 8% surcharge for capital gains tax (CGT)

….therefore many are considering incorporation. But is this a good idea?

The issues to consider:

Remaining successful in this difficult economic climate means keeping up withdevelopments in management techniques.For example at a recent Mole Valley FarmersCalf Conference experts highlighted the needfor farmers to shift their attention from feedcost per head pre-weaning and instead focuson return on investment.

As an example, Dr Alex Bach pointed out that“calves early in life have 60% feed efficiency,so for every 1kg of feed or milk powder consumed, you get 600g of gain. Whenthey’re 657-700 days old, feed efficiency is7% so, now for every kilo you only get 70g ofgain.” Successful business people have a solidgrasp of the key numbers, with farms, an in-depth analysis of any system reveals several interconnected variables that need tobe measured and managed to achieve ongoing success.

For example, with calf rearing the type andpercentage of protein and fat needs to be

considered, the mixing rate for the milkreplacer, the volume of feed, and effect ofthese on growth rate and the cost/kilo established, before arriving at a chosen solution.

After weaning any setbacks mean wastingthe gains made in the preweaning period.Regular weighing will indicate if the chosenfeed and management regime is effective.Keep up the measuring even when the animals are out at grass or assessment ofgrazing management will not be effective andagain could lead to expensive losses in eithergrowth rate or worse still actual weight loss.

Animals need an increasing percentage oftheir daily intake of feed just to maintain theircurrent body weight, the slower theirgrowthrate the more of their lifetime foodintake is taken up with covering this maintenance requirement. This needs to befactored into the costings and evaluation ofrearing systems.

Simple solutions can often be identified, forexample, at the same conference Dr Bachnoted that “Offering calves chopped straw alongside starter pellets maximizes concentrate intakes and growth, and that’s avery nice, very cheap and very effective thingto do.“

If you would like some help in identifying savings please let us know.

From April 2017, loan interest is restricted tothe basic rate of income tax, if the farmer ownsthe property personally. However, if within thecompany no such restrictions will apply.

Rental income in the hands of the farmerowner will be subject to income tax at a marginal rate up to 45%. However, a company receiving rent is subject to corporation tax currently at 19% (due tofall to 17% by 2020). Profits within thecompany can then be flexibly withdrawnto keep the farmer’s personal income taxlevels to a minimum.

Deciding on the most efficient way tohold let properties is not straightforwardtherefore contact us to discuss your specific position.

When selling a property, if owned personally capital gains tax will be at 18%or 28% after deducting your tax freeannual exemption and assuming it hasnever been used as your main residence. Ifsold by a company, any gain arising will besubject to corporation tax as detailedabove.

ROLLOVER RELIEF RESULTS IN PUTTING OFF THE CAPITAL GAINS TAX (CGT) CHARGE UNTIL THE REPLACEMENT ASSET IS SOLD. IT WORKS BECAUSE THE

CAPITAL GAIN ARISING ON AN OLD ASSET IS CALCULATED TO REDUCE THE BASE COST OF THE NEW ASSET. CGT IS WORKED OUT ON THE DIFFERENCE

BETWEEN THE BASE (ACQUISITION) COST AND THE SALES PROCEEDS AT THE POINT THE ASSET IS DISPOSED OF.

ROLLOVER RELIEF - COMMON PITFALLS

The relief can be very useful for farmers andyou can rollover into a new asset as many timesas you like but there are frequently mistakeswhich can end up in no relief being obtained.

Timing errors:

Rollover relief can defer capital gains tax if thepitfalls are avoided.

BUT, you are gambling against potential futureincrease in tax rates, consider if you need to userollover when the current capital gains tax rate is only 10 or 20%? By obtaining full rollover relief you will have tied up all the cash generated; could it be better utilised in otherparts of the business, or for family purposeseven if this means paying some tax?

Please speak to us well in advance to avoidyou falling foul of these pitfalls.

If the new land was acquired for £400,000,then the old assets proceeds would have beenfully reinvested in the new land, no tax wouldbe payable but the new land’s base cost wouldbe £150,000 (£400,000 - 250,000).

The gain above can be reduced by the available tax free annual exemption of £11,300 for 2017/18 before CGT is calculated at 10% or 20% depending onyour marginal rate of tax.

The new assets’ base cost is calculated as follows:

New Asset

Old Asset £

£

The reinvestment period is not met. Newasset must be acquired within 12 monthsbefore or 36 months after the disposal ofthe old asset

Ownership issues:The old asset and the new asset are not inthe same ownership. Same ownership isof paramount importance. For exampleMrs X has the gain and the partnershipbuy the new asset.

You are not trading when you sell/buy anasset

Partial Relief

a.

b.

c.

d.

e.

f.

g. To obtain full deferral of the gain on the oldasset, all the proceeds (net of sale costs) ofthe old asset must be fully reinvested intothe new asset(s). If not, then only partialrollover relief is obtained.

The first tranche is reinvesting the originalbase cost, followed by utilising the gain. Theamount of the gain not reinvested becomesyour taxable gain for capital gains tax.

Example:

Sale Proceeds (March 2014)

Less Cost (a)

Gain

Less Rollover Relief (a-b)

Chargeable Gain(amount not reinvested)

300,000

(50,000)

250,000

(150,000)

100,000

Acquisition Cost(December 2016)

Less Rollover Relief on old asset

Revised New Asset Base Cost

200,000

(150,000)

50,000

Does the asset qualify for relief?

‘Qualifying assets’ are:

Land and buildings used within yourtrade

Improvements to land and buildingsused within your trade

Fixed plant and machinery, for example,grain store (NOT a tractor)

Goodwill

Basic Payment Entitlements

Amount re-invested

Not all of the net sale proceeds on the oldasset are reinvested in the new asset

Sell land for £300,000 in March 2014 andmade a gain of £250,000. You purchasenew land for £200,000 (b) in December2016.

A common misunderstanding is the potential to rollover into a residential buy-to-let or office block. These are not ‘qualifying assets’. The reason for this isthat the income received is rent which is aninvestment and not a business asset.

Sean Gorman has been appointed a newDirector at Dyke Yaxley and brings with him abroad spectrum of clients and an experiencedteam of professionals.

Managing Director Laurie Riley said: “This is anexciting time for us and we are thrilled to welcome Sean Gorman and his team to DykeYaxley.

Sean, who has worked in the accountancy industry for over 40 years said: “Dyke Yaxleyhas an impeccable reputation and the firmwas the natural choice for both my clientsand staff to join.

“Although one of the largest and most-established full-service accountancy practicesin Shropshire, Dyke Yaxley has managed toretain its strong values of offering personaland friendly service.

“Our work is all about establishing long-termrelationships and professional integrity andthese things are at the very heart of DykeYaxley’s business.

“I am looking forward to working with theDirectors to both consolidate relationshipswith my existing clients and also growing ourclient base.”

DYKE YAXLEY IS DELIGHTED TO ANNOUNCE THE ACQUISITION OF GORMAN EVANS, ALONG-ESTABLISHED FAMILY-RUN SHREWSBURY PRACTICE.

WELCOME TO SEAN GORMAN AND HIS TEAM

DYKE YAXLEY’S MANAGING DIRECTOR, LAURIE RILEY (RIGHT)WELCOMES SEAN GORMAN TO THE TEAM

On The Right Track • Autumn/Winter 2017

There are laboratories who specialise in testing food so these labels can be produced,but this obviously comes at a cost.

So, should farmers assume that the newlabelling laws mean that it’s too much troubleto sell their food to the public? Not necessarily,as there are some exemptions which will helpthem. Exemptions are for minimally processedfood such as meat (but not meat products suchas sausages and pies, although see the exemptions below), herbs and honey, verysmall packets of food and alcoholic drinks.

There is also an exemption for businesses witha turnover of less than £1.4m where food is supplied direct to the consumer, (this wouldcover farmers’ markets), and where thesesmaller businesses supply food to the consumer via a third party, if this third party isa ‘local retail establishment supplying direct tothe consumer’, such as a farm shop. There arespecial rules which define what ‘local’ means in this context. It’s also worth taking care that you are not caught by the labelling regulations where the whole farm has aturnover of more than £1.4 million, but only a small part of the business deals with foodproduction, as the exemptions for smaller businesses won’t apply.

If you are in any doubt about whether the regulations apply to your business, please contact us and we will be happy to help.

NUTRITION LABELLINGLAWS – DO THEY APPLYTO YOUR BUSINESS?LAURA CLARKE, HEAD OF FOOD AND DRINK, WBW SOLICITORS

It’s fair to say that local food is big business.Farmer’s markets, farm shops, artisan pies,craft beers and local cheeses…all have experienced a surge in growth over the lastten years, no doubt helped along by socialmedia spreading the word via Facebook andTwitter.

So, it’s tempting for an agricultural businessto grab a slice of the pie, both in the real, andthe financial sense. Why not add value to yourbeef by selling pasties in the farm shop? Orhow about turning your kale into a trendysmoothie at the farmer’s market?

Some new EU legislation which came intoforce in December 2016 might make businessowners pause and consider whether there is anything they need to do, apart from the obvious food safety and hygiene requirements. Food labelling requirementshave undergone major changes with theintroduction of the Provision of FoodInformation Consumers Regulation (the ‘FIC’),which provides that provision of nutritioninformation has been compulsory from 13 December 2016. In other words, anyone,whether an individual, small farm, large agricultural business or multi-national company, who produces food must put anutrition declaration on the pack, showingcalories, carbohydrate, fat, salt and protein.

WITH THE INCREASE IN PROBATE FEES, MORE AND MORE OF US WILLCONSIDER MAKING MORE USE OF THEINHERITANCE TAX LIFETIME GIFTS ASFOLLOWS:

SIX OFTEN UNUSEDGIFT TIPS

Annual Exemption

Each individual can make lifetime gifts of£3,000 (cash or assets) in total per tax yearand the gift will be exempt from IHT. Anyunused proportion of the exemption may becarried forward for one year only resulting ina maximum possible gift of £6,000 i.e. youcannot accumulate the allowance and makeone single large gift.

Small Gifts

You can give as many gifts which total up to£250 in a tax year to as many people youwant (e.g. £200 to each grandchild). No reliefapplies if the gift exceeds £250) and there willbe no inheritance tax.

Gifts in Consideration of Marriage/CivilPartnership

The gift must be made before the weddingday and the wedding must happen for it to be effective for inheritance tax. A parent cangift up to £5,000, £2,500 if a grandparent or £2,500 if party to the marriage/civilpartnership to the other or £1,000 by anyoneelse will be exempt.

Normal expenditure out of income

To obtain this exemption the gift must be partof your normal expenditure out of income. When comparing year-on-year it must notreduce your available net income below thatwhich is required to maintain your normalstandard of living. For example, annual birthday cash gift, life insurance policy premiums paid on behalf of someone else orgrandparents paying school fees. These giftsmust be well documented and to succeed in obtaining the exemption must beregular.

Gifts to Charities

Gifts either outright or held on trust will beexempt from Inheritance Tax if you give to acharity, museum, university or communityamateur sports club. Some gifts to charitiescan also have income tax benefits.

Gifts to Political Parties

Gifts to political parties are tax free under certain conditions.

Any gifts over and above those detailedare likely to have additional implicationsin terms of Inheritance Tax and CapitalGains Tax, therefore talk to us beforemaking any gifts.

SIXTEEN MONTHS HAVE PASSED SINCE THE UNITED KINGDOM MADE THE DECISION TO LEAVE THE EUROPEAN UNION, JUST OVER SIX MONTHS SINCE THERESA MAY TRIGGERED ARTICLE 50, ANNOUNCING OUR DECISION TO BE OUT BY 29 MARCH 2019AND WHERE ARE WE NOW?

On The Right Track • Autumn/Winter 2017

1 Brassey RoadOld Potts Way, Shrewsbury

Shropshire SY3 7Fa

Telephone 01743 241281Fax 01743 235794

8 Hollinswood CourtStafford Park 1, Telford

Shropshire TF3 3DE

Telephone 01952 216100Fax 01743 235794

www.dykeyaxley.co.ukinfo@dykeyaxley.co.uk

Follow us on:@dyke_yaxley

The content of this newsletter is for general information only. It should not be relied on and

action should not be taken without appropriate professional advice.

Mark Griffithsmark.griffiths@dykeyaxley.co.uk

DIRECTOR

Ian Walshian.walsh@dykeyaxley.co.uk

DIRECTOR

Sean GormanSean.gorman@dykeyaxley.co.uk

DIRECTOR

Lynda Leelynda.lee@dykeyaxley.co.uk

CLIENT MaNaGER

Hayley Pricehayley.price@dykeyaxley.co.uk

CLIENT MaNaGER

andrew Thomasandrew.thomas@dykeyaxley.co.uk

CLIENT MaNaGER

Les Coxles.cox@dykeyaxley.co.uk

TaX CONSULTaNT

BREXIT – WHERE ARE WE NOW?

Unfortunately, we are as much in the dark aswe were sixteen months ago, possibly evenbefore the Referendum. We do not know ifthere will be a deal, the so called hard andsoft Brexit options. What we do know is thatthe world in which we will be operating post2019 will be different.

Even if we remain within a European FreeTrade Zone, we will not be operating in thesame playing field as before. In a recent publication, AHDB identified four main areasof concern for the industry: -

The results of this publication should come asno surprise to the industry, it largely reflectspoints raised by many economists and journalists over the last sixteen months.

Terms of international trade, both with theremaining EU 27 and with the rest of theworld.

Domestic agricultural policy, in particularsupport payments and rural development.

The availability of migrant labour.

The UK regulatory environment.

Direct support is likely to be replaced witha more environmental approach to subsidies, with these subsidies falling in value to the end recipient. Those businesses whose subsidy incomeaccounts for a significant proportion oftheir income or profit will need to reassesstheir business model.

Trade issues will impact on farm businessincome, the UK is a net importer in mostfood sectors and the EU is a key tradingpartner. Where the sector has significantexports to Europe, rising cost of trade

could have a downward pressure ondomestic farm gate prices.

If there are restrictions on the traditionalsource of migrant labour, this could resultin rising labour costs, the brunt beingborne in the horticultural, vegetable andsoft fruit markets.

Those businesses that are in the higherperforming bracket will be in a better position to weather the impact of Brexitand the changes in the industry resultingfrom it.

1.

2.

3.

4.

The first three points are fairly obvious andself-explanatory, with costs rising or incomedisappearing, there will always be an impacton the business.

The later point is worth exploring in moredetail. The message from ADHB is not new, inorder to understand how farms will move forward, they will need to understand theirown relative performance; not only how welldo they compare to previous years, but howwell they compare to their peers.

What needs to be remembered is that allfarms are different and what is being suggested is that each farm focuses on itsown relative performance and on pursuingpractical ways of increasing output and reducing costs.

Is it appropriate for the farm to look at collaboration to increase efficiency and performance? Should the farm be looking atinvestment or disinvestment now rather thanwaiting till the last minute to make a decision,taking advantage of current prices rather thana wait and see approach. Whilst things mayget cheaper in the future, acting now mayhave reduced risk allowing the business toconcentrate on its activity in the future.