Taxation in Agriculture

Chapter 37. United Kingdom

Abstract

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.

37.1. Overview

The agriculture sector in the United Kingdom accounts for 71.6% of land usage in 2018. Taxes from agriculture are collected by the central government as agriculture is mostly exempt from paying local taxes. For tax purposes, in general agriculture is treated the same as other businesses, however some tax concessions for agriculture and forestry exist. Concessions specific to agriculture provide tax relief for the capital taxation in inheritances encouraging the transfer and continuity of agricultural businesses between family members. Farmers also benefit from flat rate VAT schemes and income averaging provisions. The income averaging scheme is not only provided to the agriculture sector but farmers out-number the other groups able to benefit from the provisions. Intensive horticultural producers are able to claim back excise duty on heavy oil used for heating glasshouses and all farmers pay a special reduced excise tax on diesel fuel for use on-farm.

37.2. Income taxation

Owner-operators pay income taxes on farm profits subject to the normal progressive rates. However, farmers can average profits over two or five successive years when either the (average) profits of the earlier year(s) are 75% or less than the other or last year, or there is no profit in one of the years. In the averaging, profits are calculated after the deduction of net capital allowances (mostly the depreciation of capital assets according to rates determined by the taxation authorities less any proceeds on disposal of assets). Although not exclusive to agriculture, farmers (involved in the following activities: farming, market gardening or the intensive rearing of livestock or fish) use the averaging mechanism more than artists and writers, who are also entitled to average their incomes, simply because there are a larger number of farmers. The government aims to support farmers by smoothing fluctuating profits using the tax system to enable better business planning.

Special rules apply to “hobby” farmers in their ability to offset losses in agriculture against income from elsewhere; losses incurred by hobby farmers and market gardeners are not permitted to be set against income from elsewhere after five consecutive years of losses. Farm businesses arranged as companies are charged corporation tax on their profits and are not eligible to benefit from averaging. While the majority of farms are run as owner-operator businesses, there are a number of farm businesses arranged as companies, usually with tax minimisation in mind.

Farmers may also benefit from Herd Basis, which allows for treatment of livestock kept for the sake of the product (e.g. milk or eggs) or offspring (breeding livestock) as capital assets rather than trading stock, and any profit from the sale of the herd is not taxed as trading income. To qualify farmers must elect to use the herd basis mechanism when they commence keeping animals. Once in place the herd basis must be used for as long as the farmer continues to keep animals of the class specified under their herd basis application. However in the case where a herd or a substantial part of it (20% or more) is compulsorily slaughtered the farmer can claim the herd basis for tax purposes.

Current income from the occupation of forestry (both the cost and revenue sides) is not taxable. However, profits from the rental of commercial woodland are taxable.

37.3. Property taxation

Agricultural land and associated buildings used for production are exempt from the annual local property tax levied on other business assets (business rates).

Agricultural Property Relief (APR) provides tax relief from inheritance tax (the capital tax levied on transfers on death) for the agricultural value of land and property (rather than the market value of the land) at a rate of 100% (i.e. the land is not taxed) if owner-occupied, or by 50% if tenanted under the normal long-term letting arrangements. The tax relief is generous provided that the land is being farmed. If farm buildings have a development value, APR will not apply but Business Property Relief (BPR) may be possible. This mechanism encourages the business continuity of inherited agricultural operations.

Individuals disposing of assets for a gain may be subject to capital gains tax (CGT). The amount of CGT paid will depend on the type of asset being disposed of, the individual’s overall income, and any reliefs available including the individual’s annual tax-free allowance (the Annual Exempt Amount). Gains made on disposals of agricultural property are generally charged to the main rates of CGT (10% and 20%). Where used for the owners’ trade, agricultural property is largely treated the same as any other business asset on which reliefs may be available. Capital gains realised by farms structured as companies are subject to corporation tax.

To encourage the preservation and protection of national heritage relief from inheritance tax and CGT is available to owners of heritage properties in certain cases. Land (including woodlands) and buildings, works of art and other objects can all qualify as national heritage. Under the ‘Conditional Exemption Tax Incentive Scheme’ landowners meeting certain criteria can claim conditional tax exemptions. Separate exemptions also apply to the value of commercial woodlands.

37.4. Taxes on goods and services

The standard rate of VAT is 20%. Almost all agricultural output (i.e. basic foodstuffs) has a VAT rate of zero. Farmers can choose to operate under the regular value added tax regime (but with output zero-rated, which implies that they can claim back tax paid on inputs). Alternatively, they if they are not VAT-registered they can use the Agricultural Flat Rate Scheme, under which they are not required to account for VAT, submit VAT returns or make claims for VAT paid. Instead they can charge a flat rate of 4% on their sales of goods and services to VAT registered customers. The flat rate is not VAT but compensates farmers for not being able to claim back input tax on items they purchased for their businesses.

Farmers whose primary activity is to buy and sell animals, or those who are engaged in an activity once removed from farming (for example, they process farm produce) or those with non-farming activities generating incomes of more than GBP 85 000 are not eligible to join the Agricultural Flat Rate Scheme.

Another administrative simplification option is for farmers to choose to participate in the Flat Rate Scheme, which is available to all VAT-registered businesses with turnover under GBP 150 000. Under this scheme there are sectoral flat rates including an agricultural rate.

For fuel for agricultural uses there is a special low rate of excise tax (GBP 110 per 1 000 litres of red diesel, compared with GBP 579.5 per 1 000 litres for road diesel). This is worth approximately GBP 0.66 billion per year.

Horticultural growers can claim back the repayment of excise duty on heavy oil used for heating to grow horticultural produce.

Vehicles used for agriculture, horticulture or forestry are exempt from annual vehicle tax. This includes tractors, agricultural engines and light agricultural vehicles used off-road and limited use’ vehicles used for short journeys (not more than 1.5 kilometres) on the public road between land occupied by the same person.

The Climate Change Levy (CCL) is an environmental tax on energy supplies to industry, commerce, agriculture, local administration and a number of other services. It is intended to encourage the efficient use of energy by effectively increasing its price and is part of the United Kingdom’s efforts to reduce greenhouse gas emissions.

The levy covers different forms of energy including electricity, gas, LPG, coal and coke. Oil-based fuels are exempt as they are either liable to road fuel duties or to other excise duties. In April 2019, the CCL rates charged on energy were increased. To ease the CCL’s impact on energy-intensive business sectors a number of exceptions to the regime are in place. By entering into a climate change agreement (CCA) with the Environmental Agency businesses can pay a reduced rate on CCL charges. A CCA is a voluntary agreement to reduce energy use and CO₂ emissions. Businesses with CCAs receive a reduction of 90% of the CCL rate paid on electricity bills (increasing to 93% in 2019), and a 65% reduction on all other fuels (increasing to 78% in 2019).

The British National Farmers Union (NFU) has a CCA which its members growing crops in green or glasshouses can sign up to so as to receive CCL discounts in return for meeting agreed energy efficiency targets. The CCL tax discount is available until March 2023 for those producers achieving the targets.

37.5. Environmental taxes

See the description of the Climate Change Levy in the section above.

37.6. Tax incentives for R&D and innovation

To encourage greater investment in Research and Development (R&D), eligible companies can claim tax relief on eligible R&D expenditure. There are two types of R&D tax relief, the R&D Expenditure Credit (RDEC) and a more generous scheme for Small or Medium sized Enterprises (SMEs).

R&D tax reliefs are not specific to agriculture, they are available any eligible company undertaking R&D and are not limited to any one sector. Official statistics for 2017-18 suggests the agriculture industry accounted for less than one per cent of all tax claims submitted and received only GBP 10 million in tax relief. Industry breakdowns in the official statistics are based on Standard Industry Classification (SIC) codes, however this coding might not correspond to the actual industry sector of the R&D activity. The low usage of these tax reliefs by the sector is because most farmers are unincorporated (self-employed, or partnerships) and even those that are incorporated focus on production, rather than R&D.

37.7. Other taxes

There are no special provisions for social insurance used for agriculture.