The farming industry continues to be encouraged to adapt to change and to diversify income streams away from the traditional crop and livestock sectors. This becomes ever more important as the continued reduction in the annual Basic Payment starts to cut deep into farming finances although recent announcements regarding rewards for Environmental Management will help
Decisions need to be made over what form this diversification will take but often it will involve services to the general public, particularly for tourism and leisure. My experiences with diversified businesses are clear that success only stems from a business where the proprietors have a passion and enjoyment of what they are doing and that half-heartedly set up businesses will frequently fail.
As well as the decisions over what the diversification will consist of there are the usual hurdles of local planning and funding constraints. Just as important and not to be forgotten are the potential tax impacts of the diversification.
The mode of operation needs to be considered. Many diversified enterprises are administered through limited companies that are created either from the outset or after the early years of operation. Limited companies generally pay a lower rate of tax on their profits in comparison to sole trades or partnerships, but extraction of funds for the proprietors’ own needs will impact on the overall tax charge of the operation.
Capital Taxation is an important area covering both Capital Gains Tax and Inheritance Tax. Generally, the exposure to these taxes is reduced where the diversification consists of conducting a trading business (e.g. buying and selling) or some form of activity (e.g. a leisure or tourism activity) as opposed to rental generation or any passive holding of assets which are considered more along the lines of an investment activity. It is becoming more apparent that some of the Capital Tax benefits currently available could be reduced or removed with either a change in thinking of the current Government or indeed, on a change of Government in the years to come. As a result, more and more farming families are looking to ensure that property assets are moved to the right generation of the family as soon as possible.
It follows that early thought should also be given to which generation of the family will run the diversified business and whether property should be passed between generations to facilitate the business operation.
Bolted onto a core farming business a diversified enterprise has clear advantages particularly where the two or more elements of the business complement each other. With most rural businesses, succession is generally a key issue to consider, and this can be more difficult where we have different and diversified elements to the overall activities of the business. Fundamental to effective succession will be early planning and open and frank discussion with those involved. Complete financial fairness in terms of equality of capital values cannot always be achieved and this is often the most difficult factor to overcome but early dialogue is key to avoid disputes later on.
Finally, VAT will need some consideration. Diversification can create some significant issues over recoverability of VAT and on pricing to the consumer but with careful planning the financial effects can be minimised.
