Tax and finance advice when expanding your farm business

In the drive to expand, business managers often focus on the practical, but getting the financial stucture correct deserves proper planning time too. 

There can be both short- and long-term tax consequences if the wrong decisions are made and the most obvious choices are not always the best solution for the business or for the family.

Steven Rudd of accountant Larking Gowen sets out answers to some important expansion questions 

What aspects of managing expansion do people find most difficult?

• Proper planning – good organisation and considered timescales will help to focus this
• Resist chasing turnover/acres/output – don’t be busy fools
• Time and cost implications are often underestimated, especially if there is a significant distance between buildings/fields/locations 
• Avoid expanding just to find things for other family members to do – there must be a sound commercial plan before proceeding
• Accurate cashflow forecasting is a real challenge. Consider all costs and marginal costs of the expansion, not only the direct costs – are there additional overhead and capital costs – if existing resources are stretched too thin by the expansion, which can happen if it is not properly appraised and planned, there’s a danger that additional capital and other costs will be identified after the event, which will skew the justification for expanding in the first place
• Expansion costs can sometime be “lumpy” – for example, taking on a new Farm Business Tenancy (FBT) or contract arrangement can require a step change in staff and machines. Will they be fully employed from the outset?  How will that extra capacity be used in the long term –ie if the FBT or agreement is not renewed after the initial term?

See also: Top tips for expanding your farm business

What tax issues might expansion give rise to? 

• It’s important to get the structure right for tax and risk and ensure that the businesses are owned by the right people. It’s not always best for everyone to be owners of all parts of the business. Sometimes bolting things on to an old business structure is unhelpful
• If trading through a partnership or a sole trade, watch step changes in tax rates and think about withdrawal of allowances and reliefs. For example, the personal allowance is withdrawn from £100,000 income and marginal tax rates are 60%+
• Incorporation can make it cheaper to repay debt as the cash remaining after corporation tax is greater than if paying higher rates of personal tax.  However, it is important to consider the capital tax implications of a move to a company structure – take advice on this.
• Surplus cash in companies cannot just be withdrawn as loans to individuals and partnerships without tax consequences.  Consider salary vs dividends – new dividend tax rules came into effect from 5 April 2016.  It may still be cheaper to pay dividends if operating through a limited company, but this is not as tax effective as it was
• The Annual Investment Allowance is £200,000 a year, offering 100% relief against income for qualifying items – can any capital expenditure be split over two financial years to maximise tax relief?
• Have an ongoing plant and machinery replacement schedule, to ensure consistent capital spend each year. This helps both tax and cashflow planning
• If one enterprise is ceasing before another starts, there may be capital gains that can be rolled over to reduce tax bills and increase cash available for the new venture
• Be aware that additional income streams (such as contracting, diversification) can make Agricultural Holdings Act succession more of a challenge if the income is not directly attributable to the rented unit.
• Make sure you consider VAT.  A new venture could have an impact of the VAT recovery and partial exemption calculation of the existing business if there is other exempt income around

What is commonly overlooked when farm businesses expand?

• Ensure you have the expertise and knowledge to make the new or expanded enterprise succeed. The risk of getting it wrong is damage to the core business for the long term
• Time requirements – don’t underestimate them! Planning an expansion or a new enterprise can be a huge draw and take away the focus on the core business
• Management by “walking around” can’t be underestimated.  If you are stuck in the office, you aren’t doing this aspect of the job. As the business expands and you have to delegate, be visible and ensure attention to husbandry detail is not lost
• Cash flow management – farming has a huge working capital requirement and a long working capital cycle.  If the cash isn’t there, the business will fail. Maximising cash is the biggest issue rather than waiting for the biggest profits
• Insurance – ensure your policy is reviewed to cover the additional risks
• Good farmers are not always good managers.  This is a very important aspect – if the team doesn’t work together, nothing will be achieved.  Care is needed on all HR aspects and investment in this area is not optional
• Health and safety – the risks will change as the business changes – don’t overlook this – get a consultant in and document the outcomes

If the expansion is a new enterprise, how does that change the nature of the challenge or opportunity? 

• A new company or area means there is no financial history, which may make it harder to secure finance
• Be honest with yourself about whether you have the relevant experience, skills or aptitude – if not, be willing to invest in people who do have it
• Avoid trying to make money out of your hobby (shoots, equestrian, farm shops etc) unless you can challenge yourself to stand back and assess the position objectively
• It can bring unexpected advantages – for example, the addition of a new livestock unit managed for a third party (for example contract pig rearing/finishing) sometimes pays for an extra staff member who will have capacity once these livestock duties are met