CLA proposal for Rural Business Units
The CLA has submitted a pre-Budget paper to the Treasury calling for diversified rural businesses to be taxed as a single trading Rural Business Unit.
The Country Land and Business Association (CLA) has submitted a paper to the Treasury ahead of the forthcoming Budget on 11 March, calling for what would be a much welcomed simplification of the tax rules for entrepreneurial farmers and land managers.
Under the CLA's proposals, a rural business with several interconnected and interdependent commercial activities all managed as one, would be able to elect for all their economic activities to be treated as a single trading business for all tax purposes. The CLA refers to this single business entity as the 'Rural Business Unit' (RBU).
This carefully considered and logical proposal recognises the difficulties and growing pressures that most rural businesses have faced over recent years – pressures that are only likely to increase following Brexit. With that, and with the new Agriculture Bill and Environment Bill now going through Parliament, rural businesses will need to adapt to live with, and thrive under, the 'new normal'. Inevitably, increased diversification will be a large part of that, but land use will also need to change to help meet the Government's ambitious environmental targets, and the public's expectations about what the countryside is for.
A strong theme throughout the CLA's paper is that the current taxation regime doesn’t help, and indeed in many ways hinders, such change, particularly where rural businesses are unincorporated. The administrative burden is heavy, and therefore costly. The rules are inconsistent across the different taxes and overly complicated. And the tax system seems to impose artificial boundaries and restrictions stopping rural businesses from being taxed as single entities, which might be seen as "a disincentive to diversification or undertaking environmental activities".
The expected introduction of 'Making Tax Digital' for income tax is unlikely to help. In an example quoted in the CLA's paper, a diversified business with farming income and income from a campsite, 4x4 experience and AD plant exporting electricity to the grid would have to submit 17 returns a year – one per activity per quarter, and a formal digital return after the year end. Even tech-savvy farmers with full accounting software packages (not exactly the majority!) are likely to need costly accountancy input – hardly an incentive to diversify.
The CGT regime is similarly inconsistent, with important reliefs being unavailable where there are sales or gifts of business assets (such as let farmland or cottages let on ASTs) which are not used for the purposes of a trade. And for IHT, diversification by farmers and by farm tenants into non-agricultural activities, or changes to the way land is managed to meet the Government's environmental objectives, can often take assets outside APR and/or BPR – again, hardly an incentive to embrace change.
In light of these challenges, and faced with a need to "promote the economic well-being of the rural economy for the general public benefit", the CLA's proposal for the RBU is very welcome indeed. It acknowledges the fact that landowners normally regard all their commercial activities as integral parts of one business unit, and suggests that it should be possible to elect for all aspects of a rural business to be treated as a single business entity (i.e. RBU) for all tax purposes. The RBU would not be compulsory, nor should an election be irrevocable (but it would need to be made for a minimum period – 6 years is suggested).
The suggested criteria for a rural business to be able to elect to be taxed as an RBU are:
The RBU must undertake agricultural (applying a wide and more up-to-date definition than in current tax legislation), forestry, environmental and/or heritage activities on the land it occupies. The RBU could not include activities conducted on land outside the UK, or non-commercial activities.
All the activities must be managed as a fully integrated and single composite business unit – as many farms and estates will already be under Balfour principles.
A minimum of 5 hectares of land would have to be occupied by the RBU for the purposes of the activities.
Business turnover from the activities would need to exceed a minimum threshold. This would include rents from tenanted farmland, but not (for example) rents from commercial units miles away from the focus of the RBU.
Taxation under the Rural Business Unit
The paper suggests how the RBU might be treated for tax purposes:
All profits and losses would be aggregated into a single taxable amount, with only one single computation needed, potentially saving valuable time and professional fees for RBUs. Only losses 'wholly and exclusively' incurred by the RBU would be deductible.
Capital Gains Tax
Rollover Relief, Entrepreneur's Relief and Holdover Relief would all be available on the disposal/gift of assets within the RBU, subject to meeting the relevant conditions for each relief. There should be a qualifying period of 2 years following an election before the owner of the RBU could claim these reliefs, for anti-avoidance purposes.
After a two-year qualifying period, all assets held within the RBU would qualify for BPR at 100%. This is consistent with the general principle that the unit as a whole should be regarded as a trading entity for tax purposes.
The CLA's proposals for a farm or rural estate to be able to elect to be treated as single trading entity are very much welcomed. Some of the burden of tax reporting would be lifted, as would some if not all of the disincentives to diversification, investment and adoption of new environmental measures caused by the current tax regime. The RBU should therefore help our vitally important rural businesses to thrive under the 'new normal', and to survive (and be handed on) for years to come.
This important message has now reached Westminster – let's just hope the people that matter are listening.
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The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.