Episode 11 – Machinery sharing
David walks into the kitchen to find Henry at the table; head in his hands …
David: OK Dad?
Henry (sighs): I’ve done a lot of harvests but 2020 has got to be one of the worst years I’ve seen for working the land.
David (sits down): I know. Bang goes any profit this year …
Henry: And with the Basic Payment starting to reduce we need to be mindful of how we operate taking the business forward …
David (nods): Plus, we’ve got to look at our machinery; the combine and the self-propelled sprayer are both getting older and really beginning to show their age.
George (walks in): Talking about me behind my back again?
Henry (smiles): That bloomin’ combine breakdown during harvest certainly put us back a few days.
George: But on the plus side it rained for those days it was out of action! There’s life in the old boy yet …
David: I’m not so sure Grandad.
Henry: Shouldn’t we be talking to the dealers about a replacement?
David: We would normally but times are difficult … so I have a plan! I had an interesting chat with Tom who farms next door. He also needs some of his kit replacing.
George: What have you two been plotting then?
David: Well … we wondered whether we should join forces between the two farms?
George (shocked): You WHAT? Do you mean selling up to Tom and his family?
David: Not at all Grandad! They want to keep farming just as much as we do, but we agreed its madness both farms buying a combine, having a self-propelled sprayer, owning three tractors each and so on. Surely, we could operate to everyone’s advantage?
Henry: Do you mean us going into partnership with them? Am not sure. I mean, we’re already in partnership together here.
David: Not exactly Dad. We thought about forming a new business which owns the machinery and can be used across both farms. It would charge each farm depending on our respective size and cropping. We’d spread the costs across a far greater acreage than we are each achieving now and hopefully it would give us both an overall cost saving. It’s got to be the way forward given what the industry is facing …
George and Henry mull this over.
David (getting excited): I mean, we could even extend it to include sharing labour costs and recharging for our own time spent on each other’s farming operations.
George (interrupts): Hmm, a lot could go wrong.
David: I knew you’d say that and, frankly, I don’t disagree Grandad. So I went and had a very informative chat with Ensors and they suggested that if we go down this route we should all sit down, agree between us and document the ground rules, including what happens if we fall out or want to go our separate ways. That way we all know where we stand from the outset.
George: Seems sensible.
David: Ensors said we’d probably need help from some agricultural consultants or solicitors, but they would also be able to have an input into the initial drafting of the agreements. Having chatted it through I’m wondering whether it should be either a new limited company or a Limited Liability Partnership (LLP). Both of these give us some protection which limits both sides’ liability … this has got to be a good thing?
George: There must be a catch though – what about tax?
David: The new business would prepare its own accounts and tax returns. If it was set up as a limited company, the company would pay its own tax. However, if it is set up as an LLP then the profits are taxed on the individual members of the LLP just like a conventional partnership …
George sticks his thumb up.
Henry: But surely in the first year or two the new business will have tax losses because it will claim the Annual Investment Allowance (AIA) on the new kit it’s bought?
David: That’s all part of the initial tax planning. If the new business is set up as a limited company, then the tax losses are locked into that company and can only be used against future profits the company generates. It’s different if the business is set up as an LLP as the tax losses are available to the individual partners and could be offset against their other taxable income.
Henry: If all our own machinery is sold wouldn’t that give us a big tax liability as I understand that most of it has already been fully written off against tax in the past and if we sell it, we will be taxed on the monies received
David: That’s right Dad. That’s one area that we need to be particularly careful about.
George: He’s just said there are some ways to mitigate against this.
David: If the new business is set up as an LLP and that makes a tax loss in the first year from the new machinery spend we could possibly use our share of that loss to offset against the taxable profit on the sale of our own kit.
George (beaming): Chip off the old block is my grandson! Takes after me.
David (smiles): In addition, if we get the timing right for our own new expenditure we could offset the Capital Allowance claim on that against the profit on the sale of equipment. That ground source heat system for the grain store we need? If we get this in the same tax year as the machinery sales we could offset the two. Failing that, we have always got the Farmers Averaging for tax to look at to help smooth out the liabilities
Henry: Well you’ve certainly done your homework on this.
David: Let’s have a more detailed chat with Tom next door and if we all agree, we can get some further advice from Ensors.
Henry: Well done son. Oh, and you Dad!
They all laugh.
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