6 key areas to consider when planning farm diversification

Diversification ventures often require a quite different set of skills and resources than for the farm business. Jonathan Riley asked a range of advisers for top tips on six key areas in developing a project.  

The best diversifications complement the existing farm business by improving cashflow, adding profit and cutting volatility. But ventures beyond straight farming can drain time and money from the core business.

See also: Business clinic: Diversification advice for tenants

The key is to think ahead and look at every aspect of the project before making a commitment – and seek advice.

Planning

One of the main steps is to know the planning options. A diversification project that uses existing farm buildings is likely to require full planning permission for change of use.

However, since 2015, legislation changes make it possible to convert agricultural buildings for some commercial purposes under Permitted Development Rights (PDR).

Care is needed here as there are important restrictions which, if overlooked, could necessitate a full application and may risk rejection.

Development cannot begin until the local planning authority has determined in writing whether prior approval is required.

Most importantly, while change of use may be achievable under PDR, any physical changes that alter the appearance of the building will require full planning permission.

If the project does not fall into permitted development then it is important to ensure the site can take the level of development proposed and that designations such as green belt and areas of outstanding natural beauty do not defeat the project before it is started.

The traffic created by the development will be a major consideration in gaining permission and a traffic survey may be needed.

Legal issues

Consider the appropriate business structure for the new enterprise. If the diversification project falls outside the activities of the farming entity, should it have its own vehicle, what should that be – sole trader, partnership, limited company – and how should it fit with the farming business to make land and buildings available for its use?

Considering whether to trade as a partnership or limited company may depend on who is involved in the business and whether there is any major risk.

In many food processing ventures a limited company is set up to prevent any major health risks rebounding on the original farming business.

Opting for a limited company also means employees can be motivated though tax-efficient share options as opposed to higher salaries.

Where two or more people agree to run a business together with a view to a profit, whether a formal written agreement exists or not, a partnership may exist by law.

A partnership has advantages over a limited liability company, the main ones being:

• the lack of formality (agreement can be oral, implied by conduct or written)
• there are no formal reporting and disclosure requirements
• partners can claim tax relief for start-up losses

A partnership should also always have an agreement specifying who is responsible for what and, most importantly, how the business may be wound up.

Staff and training

If employing staff in a new enterprise, the National Minimum Wage (NMW) and the National Living Wage (NLW) requirements need to be understood.

It’s important to not overlook an employer’s responsibilities to provide workplace pensions.

Consider whether staff are seasonal workers, workers or employees. Individuals providing services will typically be employees, workers or temporary agency workers. This terminology matters because a person has different rights, depending on how their work status is classified.

A written contract is required by law within two months of an employee’s start date and a consultation is required if changing staff contractual terms and conditions.

A failure to consult and imposing changes could result in a redundancy and/or constructive/unfair dismissal claim.

Tax

Agricultural Property Relief (APR) allows an estate to pass to the next generation tax-free in many cases. However, diversification can prevent this valuable relief from being applied.

Activities such as solar, wind farms and yurt rental invalidate the relief. Business Property Relief (BPR) could be available instead, allowing assets to pass tax-free but planning is needed to ensure HMRC conditions are met.

If losses occur in the first year of a new venture, the correct structure can result in tax refunds.

Business plans should be drawn up and shown to accountants and other interested parties. This will help check and amend the plans before taking any decisions that could affect the tax position and before approaching banks for finance.

In tax planning terms, both income and longer-term capital gains and inheritance taxes need to be considered. 

Marketing 

It is essential to establish a brand and image that represents the ethos of the business.

A good website and social media can have a big effect, while focused advertising is important to make people aware of what is on offer.

The new venture is likely to need a very different approach to that for sales of primary farm produce, so consider the challenges of seasonality, perishability and stock control.

This can also have huge implications for cashflow, which may be very different to that of the farm and this needs to be considered in the planning.

Financial planning 

Detailed business plans must be presented to the bank. Market research for the project is important to assess whether the market size is available locally and the standard and quality of local competition. By doing this the risks become more obvious.

This all needs to be turned into a financial plan that highlights the profitability and cashflow, which can be problematic when starting new ventures.

Cashflow also needs to be factored in when accounting for voids if the venture involves letting or a B&B, for example.

Draw up a complete list of all the main expenditure and then break it down into its constituent parts and price these up individually.

Consider timing of expenditure outlay and then at the end build in a 7.5-10% contingency allowance for overspend.

Most projects go over budget because they have not been properly planned. Always break items down in detail to avoid having to go back to the bank for extra funding.

Having done the financial figures, stress-test the budgets with a higher interest rate and rigorous analysis, i.e what happens if yields or margins change by 5% or unit prices change by 10%. This will establish the break even points.

Expert sources

Acorus rural property consultants
Brian Barrow – planning director

Bidwells property consultants
Ian Ashbridge – partner

Clarke Willmott Solicitors
Rod Lloyd-Jones – partner
David Maddock – partner
Kate Gardner – partner

Farm Consultancy Group
Ian Browne – consultant

JMH Farming & Renewables
James Miles-Hobbs – director

Oury Clark solicitors and accountants
Antony Smith – tax manager
Simon J Walsh – associate solicitor

Rural Futures development consultants
John Welbank – management consultant