Diversification tax planning

by Graham Page

The farming industry will continue to be encouraged to diversify their businesses and COVID19 will no doubt have an impact on how much of this diversification will involve services to the general public. In addition to the decisions over what the diversification will consist of, there are the hurdles of local planning and funding constraints.  Consideration should also be given to the potential tax impacts of these business changes.

Firstly, 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 also an important area to consider, 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, as opposed to rental generation, which is considered along the lines of an investment activity.  It is becoming more apparent that some of the benefits currently available could be reduced or removed as the Chancellor has commissioned reports into the value for money of these tax reliefs.

Finally, the treatment of VAT should not be forgotten.  Diversification can create some significant issues over recoverability of VAT, but with careful planning the financial effects can be minimised.

For more information, please see our dedicated agriculture page.

Author

Graham Page

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