Diversification – don’t forget the tax!

Category: Agriculture - Posted On: Jul 2 2019


Farming can be challenging, and often unpredictable, so more and more farmers have looked to diversify their business. Whether it is in the form of renting out land, converting farm cottages into holiday lets or investing in renewable energy equipment, it is important to consider the various tax implications of diversifying your farm business.

  • VAT

Partial exemption from VAT arises where a business makes taxable and non taxable supplies. For example, if cottages which were previously occupied by farm workers are instead rented out, the sales and purchase VAT in relation to this property rental would not be allowed to be included within the VAT returns of the farming trade. Partial exemption involves more complex calculations and additional bookkeeping work and therefore it is important to understand how this may impact on your business.

  • Income tax

When calculating a farmer’s income tax liability, if there has been a large fluctuation in profits/losses generated between years, an averaging adjustment can be applied to spread the results over a period of up to 5 years to reduce tax liabilities. This adjustment is only available to farming profits and therefore any profits/losses generated from diversification such as rental income will be taxed as usual in the year they arise and the opportunity to utilise the averaging adjustment will be reduced.

  • Inheritance tax

When calculating inheritance tax, the value of farmland is usually covered by agricultural property relief and business property relief. The rate of this relief can be 100% and it can also be applied to buildings, such as farmhouses and cottages, provided that they are used for agricultural purposes. If farm properties are used for other purposes, such as holiday lets or industrial units, consideration will be needed as to whether these reliefs will still apply.

  • Capital gains tax

When disposing of a business, entrepreneurs’ relief may be available which reduces the capital gains tax charge to 10% of the taxable gain. There are very specific rules on whether a business qualifies for this relief and any diversification away from your farming trade may reduce the amount of relief available to you.

  • Government funding

Finally, it is worth bearing in mind that any government funding received is normally based on specific details of your business activity. You may lose the rights to some or all of this funding if you change aspects of your farm operations, such as renting out land to others to farm.

The above are just a few of the ways that diversifying may impact you. If you are considering making changes to your business, and would like to discuss the implications of doing so, contact our specialist EQ Agriculture team on agriculture@eqaccountants.co.uk or call your local office contact.