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Welcome to the first edition of our

Agriculture & Farming newsletter.

The farming and agricultural industry is fast changing. We aim to keep you up to date with the

main issues and challenges that currently face the agricultural world. We have many technical

topics planned for the future ranging from the quota issues to pension changes, our newsletter

will be quarterly.

In this edition we identify the main drivers of the CAP reform and those areas that need careful

thought, the importance of partnership agreements and the development of land & property

businesses. In addition to this, we will also be including an overview of fair valuation of stock.

Finally, we will be outlining an overview of crowdfunding in relation to the agricultural industry.

Crowdfunding

P2 CAP Reform .

P3Partnership

Agreements

P4 Development

Land & Property

Businesses

P5 Fair Valuation

of Stock

Contact

Information

P6

P8

Agriculture & Farming

VOL. 1 January 2015

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CAP REFORM The CAP reform is gaining pace with clearer guidelines on the new rules. We have explained below the main areas which need careful thought. Active Farmer To qualify for the Basic Payment Scheme a claimant must be an “active farmer”. All farmers qualify unless they fail one of two tests. Test one relates to a mandatory negative list of business types which include airports, railways, water companies, real estate services and recreational grounds. Where a business meets one of the above definitions, if it can be proven that farming makes up a significant part of the income of the business it could have their eligibility restored. EU member states have also been given the choice to introduce a threshold of up to 5000 Euros so that if a claimant receives annual direct payments below this amount then the mandatory negative list would not apply. The second part of the active farmer test refers to a minimum level of activity and affects claimants when 50% of their land is naturally kept in a state suitable for grazing or agriculture. DEFRA One of the main areas that may affect most farmers is the impact on real estate services. However, it is understood that this will capture two groups of claimants those who operate as property agents or property development businesses. On this basis, genuine farmers who let some of their agricultural land, run holiday lets and let buildings convert to offices, cottages or storage are unlikely to be caught. If there is some concern that the farming partnership may get caught under one of these negative business types, it may be an option to look at separating the activities into different structures. We would advise you to seek advice as soon as possible. Entitlements England is rolling forward the existing set of entitlements from 2015 when they become the Basic Payment Scheme. If any Basic Payment Scheme entitlements cannot be claimed as the claimant has insufficient eligible land then the unclaimed entitlement will be permanently lost. Anyone with excess entitlements may want to consider selling them from January 2015. Conversely, if any eligible land has no entitlement, you may wish to consider purchasing some before the 2015 claim year.

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Greening

From 2015, there will be a new greening payment. This will be worth about 30% of your total payment. There will be 3 greening rules: 1. Crop diversification: This will apply to farmers with more than 10 hectares of arable land. 2. Permanent grassland: Land which is used to grow grasses or other herbaceous forage and is not included in the

crop rotation for 5 years or more (consecutive lays do not break the 5 year rule). The percentage of permanent grassland – compared to the agricultural area – in England must not fall by more than 5%.

3. Ecological Focus Areas: Farmers with more than 15 hectares of arable land must have ‘Ecological Focus Areas (EFAs)’. These areas must be equivalent to at least 5% of their total arable land.

It is important that consideration is given to the cropping for 2015. You can find out more about crop diversification and the exemptions from this rule in ‘CAP Reform in England: what you need to know now’

( RPA website: www.rpa.defra.gov.uk/sps2014).

There is still a great deal which is not yet known about the CAP reform. It is essential that careful planning is carried out to ensure any restructuring does not impact on other taxes. We are expecting to learn how HMRC will handle the 2015 CAP package, within the next few months.

THE IMPORTANCE OF PARTNERSHIP AGREEMENTS It is very common that sons or daughters are active members of the family farming business, initially as a farm worker and then eventually as a partner. In some cases, there is no evidence of a partnership agreement and where there is a partnership agreement, there are questions as to whether it is sufficient. The recent case of ‘Ham v Ham’ illustrates the need to have a robust legal agreement to avoid disputes and to protect tax reliefs. In this case, Mr and Mrs Ham, husband and wife, started their dairy farming business and in 1997 they brought their son John Ham into the farming partnership. Mr and Mrs Ham owned the farm including farmhouse, buildings and land and the business, whereas John had no capital of his own. In 2009, the three way partnership began to unravel. John wanted to drive the farm in one direction, and his parents disagreed and refused to relinquish control. John then ‘retired’ from the partnership in February 2009, citing irreconcilable differences with his parents.

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It would appear that the dispute occurred because of the poorly worded partnership agreement. The initial court hearing decided that, as a matter of interpretation of the partnership deed, John’s share was to be determined on the same basis as annual accounts were drawn during the continuation of the partnership, rather than on the basis of an up-to-date market valuation of the partnership assets. The terms of the partnership agreement in this case stated that the other partners would buy out the leaving partner after three months notice of the intention to quit. It is here that there was the key dispute over the value of the buyout: a. Mr and Mrs Ham argued that their son’s share should be assessed on the book value of the assets – a far more

meagre pay-out as it ignores the soaring land values, whereas b. John felt he was entitled to a share of a full market value of the farm. John appealed this decision and the case went before the Appeals Court in London in October 2013. The three judges ruled that ‘John was legally in the right and that his parents must be held to the bargain they struck with him 15 years ago’. There is also the need to identify what is ‘personal’ property and what is ‘partnership’ property for the availability of 100% as opposed to 50% business property relief (BPR) for Inheritance Tax. A clearly drafted partnership agreement will help to secure BPR.

For further guidance on partnership agreements please feel free to Contact Us on, T: 01606 369000.

DEVELOPMENT LAND AND PROPERTY BUSINESSES Rollover Relief With development prospects of land increasing, the tax planning opportunities for farmers needs careful consideration. In particular with recent cases such as Elisabeth Moyne Ramsay v HMRC giving confidence for landowners with less trading activity to be considered as running a business. The property business in question consisted of a single investment property: a house converted into ten flats. The property rental business was transferred into a Limited Company prior to redevelopment of the property. Once incorporated the new company proceeded with redevelopment plans. Property business profits were returned under Self-Assessment as income from property and not trading. The taxpayer devoted approximately 20 hours a week to various activities of collecting rents and property and garden maintenance. The taxpayer claimed incorporation relief on the disposal of the property to the Limited company for capital gains tax. This resulted in no capital gains tax, as the gain on the transfer was rolled over into the shares of the Limited Company.

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However, HMRC has long argued that there is no business in ordinary letting as it is an investment activity and denied the relief. In 2012, the First Tribunal found that the scale of the activities undertaken was commensurate with the size of the property but that they did not amount to business activities and agreed with HMRC. The taxpayer took the matter to the Upper Tribunal who decided that residential property letting is a business for the purposes of roll over under incorporation relief. The main basis for this is that HMRC treat property letting as a business for corporation tax purposes and as such meant that the same activity when transferred to a company was eligible for roll over. Entrepreneur’s Relief Entrepreneurs’ Relief is a capital gains tax relief available to taxpayers who make a qualifying material disposal of a business which includes the disposal of more than a 5% holding in shares or securities of a trading company or a partnership interest. The business, shareholding or partnership interest has to be held for more than one year ending on the sale. The date of the asset disposals must be within three years after the date the business ceases. The relief reduces the level of tax to 10% on lifetime gains of up to £10 million. There are various provisions to scale back the relief on associated disposals, e.g. where rent has been paid, or where there has been non-business use. If the individual is withdrawing from the business and as a consequence disposes of the whole or part of his/her interest in the partnership, or disposes of all or some of his shares or securities in the company then at the same time any disposals of personally owned asset used in the partnership, or in the company can also obtain entrepreneur’s relief. The intention of what “withdrawal” means by HMRC is reference to an example of a father and son partnership, where the share of the father reduces from 60% to 20% and he continues to work in the business. It is imperative that careful planning is undertaken to understand what counts as a cessation of a business and associated disposal, this will include identifying who owns the asset. Another recent case of ‘Rice v HMRC’ shows how a significant change in the way a business is operated may be sufficient to create a cessation qualifying for Entrepreneurs’ relief. The First-tier Tribunal decision held that a significant change in a business was a cessation of one trade and the start of a second business. The taxpayer, Mr Rice, was in business selling used sports cars at premises on Fletton Avenue, Peterborough, but because of vandalism and other matters he stopped trading from there in 2005 and sold the property in 2008. He began selling cars from a site next to his home and changed the way he operated by no longer having cars on display because there was no passing trade; started advertising on the internet, selling four-wheel drive and family cars instead of sports vehicles. Mr Rice claimed Entrepreneurs’ Relief on the disposal of the premises on Fletton Avenue, on the basis there had been a cessation of the business. HMRC refused the claim.

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The tribunal agreed with the taxpayer that Entrepreneur’s Relief was available. They placed emphasis on the Burma Corporation case, which established the principle that the relocation of a local business could give rise to a permanent discontinuance of one business and the commencement of a different trade. It was submitted on behalf of Mr Rice that the changes in his mode of business were sufficient to fall within that principle.

FRS102 FAIR VALUE OF STOCK For periods beginning on or after 1 January 2015, under new Accounting Standards FRS 102 entities will have to choose whether to value each class of living animals and its related agricultural produce under fair value or cost. Once adopted, it will not subsequently be permitted to change the policy back. Fair Value Where the fair value model is applied biological assets (living animals) are measured at fair value less costs to sell. Agricultural produce is measured at fair value at the point of harvest less costs to sell. Fair value hierarchy will be determined by: If an active market exists the price in this market should be used If an active market does not exist then you may use one or more of the following:

The most recent market transaction price where the market has not been subject to a significant change

Market prices for similar assets, adjusted to reflect the differences Sector benchmarks

It may also be very difficult to ascertain fair value and in these cases you would adopt the cost model with extra disclosures to the accounts as to why. The costs of implementing the requirements and the fact that fair value accounting could lead to a high degree of volatility in reported results, it is unlikely that many accounts will see a change in policy.

For more information on the changes in accounting standards please contact: Suzanne Preston, T:01606 369000

Crowdfunding Crowdfunding was originally developed for creative projects such as films and album recordings, but since the global financial crisis in 2008, which created difficulties for banks’ to lend money to SMEs on normal terms, crowdfunding for business funding has gained momentum, providing a powerful and cost-effective tool in validating and marketing businesses as well as raising funds.

Stuart Dutton, head of Corporate Finance at Howard Worth expands on the basics on Crowdfunding;

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There are four different types; Donations; contributions towards good causes, charities and social enterprises, generally for the benefit of

projects that the ‘crowd’ really believe in. Rewards/incentives; these are popular for launching gadgets, high tech or creative arts, and mean that the entity

raising funds doesn’t repay money pledged, but provide related ‘perks’ Debt or loan (peer-to-peer lending); by presenting financial information and track record, entities obtain a loan

which is repaid to the ‘crowd’ with interest. This may be on an ‘all or nothing’ basis, where the target fundraise has to be met or no funding at all is secured. No equity in the business is lost.

Equity & shares; capital is raised in return for a stake in the business often for start-ups and small, growing businesses. Lenders benefit from dividends (if the project is profitable), or a gain upon eventual sale of the business/shares.

It is clear that the UK Government is keen to encourage the growth of crowdfunding, with investment via the British Business Bank Programme into both Zopa and Funding Circle explained to be the most effective method of ensuring that the funds get to start-ups and small businesses. George Osborne has also introduced other incentives such as the ‘Seed Enterprise Investment Scheme’, which enables investors to benefit from up to 78% tax relief on the money invested. It has also been announced that peer-to-peer lending will be permitted for inclusion in ISAs from April 2015. Perhaps it is because of these incentives, in addition to the current climate generated by austerity measures and restrictions placed on the more traditional forms of finance. However, businesses should not think of it as an either-or situation; while SMEs struggle to procure capital loans from banks, they should consider using both traditional and crowdfunding in order to secure the funds they need, plugging the gap which maybe left by the banks. As technology develops, and the market gains greater awareness of the opportunities made available by crowdfunding, interest rates for business may fall and become more attractive. In 2013, more than 9.4 million active donors were on the UK crowdfunding platforms, and a new project is now created every 3 minutes. Due to the growth, the Financial Conduct Authority (FCA) has produced guidance warning that many on the opportunities on crowdfunding platforms are high-risk and complex, which should only be considered by sophisticated investors only. The main reason for this is the Office for National Statistics suggests that up to 70 per cent of start-up businesses fail. However, investors are able to self-certify that they are aware of the risks and in turn are free to make the investments that they choose. Furthermore, the FCA do not prescribe the level of due diligence required to assess the benefits and risks involved with the investments, making the obligations for the platforms less onerous than they could have been. So the regulation tends to be more in terms of the investors as opposed to the borrowing entities. For businesses looking to raise funds that they cannot obtain from more traditional sources, it could be a great opportunity.

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For help and advice please contact one of our Agricultural Specialists.

Richard Barnett

T: 01606 369 000

E: richardbarnett@howardworth.co.uk

Suzanne Preston

T: 01606 369000

E: suzannepreston@howardworth.co.uk

The business essentially pitches the proposed venture to potential investors via the chosen website (platform), advising what rewards will be provided to the people who make an investment and make the project happen. The platform used will depend on a number of factors including the industry, the type of funding desired, the value of the funding required etc. Once the platform has been selected, information should be submitted for the ‘crowd’ to determine whether the funding will be settled. This will differ, depending upon the nature of the funding, but may include a business plan (including exit strategy) and financial forecasts, historical financial statements, availability of guarantees and video investment pitches. Howard Worth can assist in the preparation of this information as well as the selection of the appropriate platform. When considering an equity investment, it is important that you understand what value you are prepared to put on your business, consider how much you are looking to raise, how much equity you can offer in return and whether it is a fair and reasonable calculation. Again, Howard Worth can assist with determining the valuation with sufficient workings to withstand scrutiny of its calculation.

If you are interested in crowdfunding or any type of business finance, please contact: Stuart Dutton, T: 01606 369000 E: stuartdutton@howardworth.co.uk

Northwich Office:

Drake House, Gadbrook Way, Gadbrook Park, Northwich, Cheshire,

CW9 7RA T: 01606 369000 || F: 01606 369010

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