Spring Budget 2023

Listening to the Chancellor make his Spring Budget announcement today I was eager to hear what would be done to support Britain’s farmers. Global food supply chains are creaking, food price inflation is running at 15% and farmers are in the process of transitioning from the Basic Payment Scheme to the Environmental Land Management scheme (ELMs), with a substantial loss of income. The profit motive is evaporating from farming.

Farming is at a critical juncture and Government intervention is needed to secure the continuation of domestic food production and achieve food security ambitions. Yet, farmers and agribusiness were not mentioned during Jeremy Hunt’s hour at the Dispatch Box and agriculture was only mentioned twice in the 122-page published Spring Budget.

Many farmers are either downsizing production or leaving the industry altogether. Glasshouse growers are not making enough on their salad crops to pay for the heating required. Many beef and sheep farmers are considering whether to reduce herd sizes in the coming year.

While the direct support farmers need to manage today’s rising costs in a price inelastic market was not there, the Chancellor repeatedly demonstrated the Government’s commitment to sustainable technologies and clean growth. These measures will produce benefits for the agriculture, food and farming sector over time. The full capital expensing announcement worth £9bn a year is likely to have the most immediate benefit to the farmers, processors and manufacturers investing in new plant, IT and machinery.

The £20bn scheme for carbon capture, utilisation and storage (CCUS) may offer a new income stream for farmers and the drive to get artificial intelligence (AI) to market faster will help to resolve labour shortages in the mid to longer term, as will the drive to get more people into work. Tax reliefs on energy efficiency measures may also motivate businesses to diversify into clean energy.

Where agriculture was only mentioned in the report, plans were laid out to call for evidence and consultation to explore both the taxation of ecosystem service markets and the potential expansion of agricultural property relief from inheritance tax to cover certain types of environmental land management. In its second mention, the geographical scope of agricultural property relief and woodlands relief from inheritance tax to property is set to be restricted from April 2024.

There was less support for farming and agriculture than might have been offered, particularly in addressing immediate concerns around inflation, availability of credit and labour shortages. However, the commitment to increasing investment and productivity through sustainable measures will benefit farmers in the years to come.

Jeremy Hunt’s first budget was interesting and, on inspection, there is more to it than meets the eye.

Firstly, and largely as expected, the Budget confirmed that the tax treatment of the farmers’ lump sum exit payment would be a CGT matter subject to Capital Gains Tax rather than Income Tax, and detailed legislation will follow in the Finance Bill. It did not, however, add anything to the detail of how it will work for partnerships and companies, where the ownership of BPS entitlements and extraction problems still seem to remain.

In an unexpected step, it was also announced that there would be a “call for evidence” and consultation “to explore both the taxation of ecosystem service markets and the potential expansion of agricultural property relief from inheritance tax to cover certain types of environmental land management." This aspect is dealt with further elsewhere in this newsletter.

The extension of capital allowances with a three-year window of “full expensing” on plant and machinery and a 50% first year allowance on special rate machinery will be helpful for corporates but of little relevance to the vast majority of farming businesses which do not have expenditure of over £1 million, nor do they operate through a corporate structure. It does however give a slightly different angle on how capital-intensive diversification might be structured in future.

Finally, the proverbial rabbit from the hat was the proposal that annual pension contribution allowances will rise from £40,000 to £60,000 and that the existing fund cap, will be abolished. This has proven somewhat controversial although misunderstood by some commentators who missed the point that the tax-free lump sum remains frozen at current levels. The changes may be at least partly reversed following the next election. In the meantime it may be of considerable relevance for those who will see exceptional levels of profit in the transitional basis year, throwing yet another variable into the “spreading or averaging” equation. If a four-partner farming business can make pension contributions of £240,000 (plus whatever brought forward relief is available) it would certainly take the sting out of an acceleration of profits where high commodity prices coincide with transitional calculations.

The concept of an unlimited pension pot also returns the relevance of the Self-Invested Pension Plan (SIPP) to the table. As land prices reach ever higher levels an uncapped pension fund has both practical and tax advantages, particularly where a purchase in anticipated in the future (e.g. where a neighbour is retiring, his land is known to be coming onto the market and there is sufficient time to build up adequate funds in a pension environment). It remains to be seen whether the relief will remain uncapped long enough for such plans to come to fruition, but on the basis of “hoping for the best and preparing for the worst” it is certainly worth a discussion.

Following on from the Spring Budget, the call for evidence and consultation on the “Taxation of environmental land management and ecosystem service markets” is now available from HMRC.

• Taxation of environmental land management and ecosystem service markets open consultation

This is probably one of the most important tax consultations for the farming sector in recent years, covering not only the issues within the title but also possible changes with wider implications for IHT.

The consultation is pleasingly concise at only 26 pages, the majority of which provide background information, covers and data protection disclosures, the key area being on some ten pages only.

Part 1 covers the current effect of “ecosystem service payments” (ESPs) are already having on business models, then goes on to consider what taxation uncertainties exist (presumably covering which tax applies to certain sources of revenue) and also how timing differences between income and expenditure should be handled.

The second part of the consultation is solely concerned with IHT, the range and nature of tax uncertainties and what guidance or legal changes are required to mitigate these. It acknowledges that the reliefs given in s 124c IHTA are now largely obsolete (and could possibly be removed) and also confirms the long-held suspicion that “land that is taken out of agricultural production over an extended period…is unlikely to qualify for APR”. Where land is farmed in-hand, BPR may be available instead, but, in the case where a non-farming landowner has a tenant who wishes to take land out of production, all entitlement to IHT relief might be lost. Since the object of the exercise is to ensure that the principle of moving land into environmental schemes is not discouraged, it examines what changes might be required in this respect. It also looks at land in schemes outside the key Environmental Land Management regime (ELMs) and considers how and whether land held under conservation covenants or on verifiable alternative registers such as the biodiversity net gain register or UK land carbon registry could also be relieved. It also examines valuation issues but expresses a note of caution, stating that any legislative changes would not give relief to “land that has never been agricultural or used for agricultural purposes”.

Finally, the paper takes forward the point raised in the 2022 Rock Review, that reducing the 100% APR availability on short Farm Business Tenancies might encourage landlords to let land on longer terms. The consultation goes beyond Rock in some respects, considering possible unintended consequences including the possibility the landowners might prefer keeping land in hand when faced with a rolling eight year wait to recover possession. Those with long memories will recall the reluctance of landowners in such circumstances to relet land at all, prior to the introduction of fixed term farm business tenancies. The Rock Review also suggested that there could be some circumstances, such as seasonal cropping arrangements, which could be excluded from the change, and the consultation asks what exclusions might apply and how this would be legislated.

Two general points are also covered within the document which are perhaps worth mentioning. Firstly, the HMRC view on the existing position is clarified: “…However, owner-occupiers may continue to benefit from BPR if the land is still used in the business (which) is not one of…holding investments”. Secondly, the objective of the review “…is to ensure that land taken out of agricultural production...does not lose relief” where the change is made for the purposes of environmental schemes.

We would strongly recommend that all those involved in the industry take the time to read this and feed back to HMRC as soon as possible to give examples of how changes might impact their own business and the industry generally.