Spring budget 2023: Policy reforms needed to back British farming

To harness the agricultural sector’s potential to reach the UK’s net zero targets, Joe Spencer, partner at MHA accountancy group, called for an extension on R&D and related tax reliefs on energy efficient solutions and the continuity of existing reliefs for installing wind, solar, and other green technology on farmland.

“Providing the agricultural sector with sufficient incentives to install green energy will be central to the government meeting its net zero targets by 2050. With 11% of UK electricity demand already being met by solar, the government must harness farming to build on this success, not let it wane,” he stressed.

Although the sector welcomed the introduction of Bio-Diversity Net Gain schemes in 2021 as a means of protecting the natural environment, many farmers are confused as to how it impacts their Capital Gains and Inheritance tax (IHT) positions, Mr Spencer said.

“Clearer guidelines and legislation would empower farmers to make confident decisions and ultimately encourage greater use of the scheme.

“The sector will also be hoping for renewed assurance on the long-term security of Agricultural Property Relief (APR),” he continued, “which provides farmers with much-needed relief from IHT.”

Mr Spencer emphasized changes to APR legislation would have a fundamental impact on the industry and succession in farming businesses, should there be a requirement by the successors to fund IHT on agricultural land which currently benefits from relief.

“Within the capital allowances regime, while the super deduction is expiring on 31 March, a similar deduction for unincorporated farming businesses would be very welcome,” he added.

“Many farming businesses operating as partnerships were unable to benefit from the super deduction relief as it was only made available to corporate businesses. The Spring Budget presents an opportunity for the Chancellor to right that wrong, especially at a time when our food security is more important than ever,” Mr Spencer concluded.

Support for farming families amid soaring inflation

NFU Mutual has urged the Chancellor to thaw frozen tax thresholds over concerns that keeping income tax, IHT and child benefit tax allowances unchanged for years despite high inflation is affecting the personal finances of farming families.

In a bit to raise extra tax without being seen to increase headline tax rates, the Government has pledged to keep the thresholds at which people pay tax fixed until 2028. However, with inflation running at near 10%, this means more and more farming families are being caught in a tax trap.

Along the same lines, the freeze on child benefit tax is causing more families to repay or opt out of child benefit as wages increase to keep up with inflation. Farmers’ ability to pass assets down to the next generation is also being threatened by tax-free allowances on IHT being frozen, the rural insurer warned.

“Rising incomes and asset prices mean more and more farmers are being drawn into 40% and 45% Income tax rates, the Child Benefit tax charge, and Inheritance Tax,” Sean McCann, chartered financial planner at NFU Mutual, explained.

“Thawing some of these frozen thresholds in the Spring Budget by uprating them in line with inflation will help many, including farmers, deal with rising bills.”

While APR and Business property relief can help reduce or eliminate IHT on qualifying farms and business assets, more farming families could run into IHT tax bills on other assets such as let residential property, investments and personal belongings.

“Inheritance tax is unnecessarily complicated and ripe for reform,” Mr McCann said. “Getting rid of the myriad of gifting allowances in favour of one annual gifting allowance of £15,000 would help simplify the tax for the increasing number of families who fear being caught by inheritance tax.

“The Government could also remove the rules that wipe Capital Gains Tax on death if you claim Business Property Relief, meaning those families who sell businesses they inherit would pay CGT should they choose to sell rather than continuing to run the business.”

In addition, he urged the government to increase the amount people can accumulate in pensions without attracting a tax penalty to help farmers plan ahead for retirement and avoid being a financial burden on younger generations.

“Although farmers typically work late into life, many rely on a personal pension as an independent source of income, allowing them to gradually hand over the farm to the next generation.

“Increasing the amount you can accumulate in pensions without incurring a tax charge will help farmers plan how best to hand the farm down to the next generation,” Mr McCann concluded.

With the cost of living crisis still ongoing, NFU Mutual Farm Specialist Chris Walsh said deferring the planned 5p rise in fuel duty and extending the current energy price guarantee for households would help the finances of farmers and rural communities.

“Farmers are facing rising input costs, and rely heavily on fuel to get food from farm to fork.

“Deferring the planned 5p rise in fuel duty for another year will help reduce additional costs to farmers,” Mr Walsh said.

He added that while red diesel is commonly used for agricultural work, farmers also use white diesel and petrol to transport livestock and produce around the countryside.

“Energy bills are also proving costly,” he continued, “especially for energy intensive sectors such as horticulture so we support calls from the farming unions to extend the Energy and Trade Intensive Industries (ETII) scheme to include horticultural and poultry production.

“With 12% of rural households living in fuel poverty, maintaining the current energy price guarantee on average household bills would make a difference to people in the countryside who are struggling to cope,” Mr Walsh said.

Summarizing its recommendations on how the Chancellor could best support British farmers in the year ahead, NFU mutual has issued a five-point plan for the 2023 Spring Budget:

1. Thaw frozen tax thresholds
2. Increase appeal of pensions
3. Simplify inheritance tax but retain Agricultural and Business reliefs
4. Defer the planned 5p rise in fuel duty
5. Maintain energy relief support for rural households

NFU urges Chancellor to prioritise food production

In a letter to Jeremy Hunt ahead of the Spring Budget, NFU president Minette Batters has called for greater support for domestic food production as energy, fuel and other production costs continue to soar.

The letter emphasized the need to extend the Energy and Trade Intensive Industries (ETII) scheme to include energy intensive sectors such as horticultural and poultry production.

It also called for an extension to the current reduced rates of fuel duty, including for red diesel, and for improved support for capital investment. Specifically, the NFU is calling for the Treasury to extend the Annual Investment Allowance to structures and buildings or increase the general rate for structures and buildings to 10%, to encourage small business investment in UK agriculture.

Moreover, the NFU is asking for a delay to the implementation of Basis Period Reform for business with accounting periods that don’t align to the tax year, and for the Chancellor to amend the date from which interest is charged on additional tax resulting from the reform from when that payment is due.

Commenting on the upcoming budget, Mrs Batters said: “If the government is to halt food price inflation and help prevent further food shortages, greater support and confidence is needed for the thousands of farm businesses which are trying, but struggling, to feed our nation.”

She went on to criticise the fact that the ETII scheme completely overlooks primary food production.

“An urgent review into the ETII is needed to ensure that essential and vulnerable food producing sectors, such as protected horticulture and poultry production, do not face a cliff edge when the Energy Bill Relief Scheme ends later this month,” she stressed.

“Improving support for capital investment and extending the reduced fuel duty rates would also give farmers and growers across all sectors greater confidence, especially as the cost of red diesel remains almost 40% higher than it was last April,” Ms Batters added.

Helping farmers deliver growth and net zero

To maximise the rural economy’s potential to deliver growth and help the government reach its net zero targets, Gail Hall, partner at Warners Solicitors, shared some suggestions for the upcoming spring budget.

When it comes to modernising the agricultural sector and promoting growth, she said a simplification of capital allowances would be most welcome. This could be achieved by extending the UK Annual Allowance of £1 million to include buildings and structures, which would stimulate investment in agricultural buildings and equipment and infrastructure.

Business rates should also be reviewed, she continued, as despite the changes in 2022, they place a burden on the rural economy. “The Small Business Rate Relief ceiling could be lifted to £15,000, the multiplier could be permanently frozen and rates on empty properties could be abolished.”

Moreover, since many farmers have diversified into tourism, Ms Hall said a permanent reduction to 12.5% VAT for accommodation and attractions would help businesses bounce back after Covid and build long-term resilience.

She also called on the government to bridge the rural-urban digital divide by providing digital connectivity in rural areas, which is vital for the vital for the rural economy to fulfil its potential and would increase productivity.

In terms of delivering net zero, Ms Hall urged the Chancellor to restate his guarantee on APR and Business Property Relief.

“Many farmers are thinking about taking some of their land out of agricultural use to deliver environmental objectives. Biodiversity, tree planting and carbon sequestration can help meet the government’s public goods objectives, but the crucial thing is for farmers to know that their land will still qualify for inheritance tax reliefs.”

She also urged the government to consider helping residential landlords and homeowners decarbonise their homes.

“There has been low uptake on government schemes (Green Home Deal and Home Upgrade grants). Low carbon heating devices like air source heat pumps are not as popular as expected,” she noted, posing the question, “Could government allow landlords to claim capital allowances for this?”

Lastly, Ms Hall remarked the zero VAT rate for energy saving materials until 31^st March 2027 doesn’t go far enough in incentivising homeowners to opt for energy efficient installation works. She explained the rate only applies to installation of qualifying energy materials and not where the materials are purchased separately.

Therefore, when energy saving materials are installed at the same time as other works are carried out on a residential property by the same contractor, the benefit of zero rate on energy saving materials is denied. To avoid energy efficient installation being seen as an additional cost to overall refurbishment, Ms Hall suggested taxing each element of the materials separately.