Practical and tax tips for farm diversifications

Diversification is about 
adding profit and value to your existing business – making the most of your assets, writes Stephen Rudd. So what should you consider when setting up a new venture?

Project appraisal

• Market research is essential to understand the project, the competition, profitability, and cashflow requirements.
• Don’t underestimate the amount of time and resource required to get things established – it can be a drain on the core business.

Income considerations

• Adding to an existing successful business could lead you straight into higher rates of income tax, so consider whether the new venture should be part of the existing business or separate.
• Companies pay tax at lower rates than individuals and potentially give more flexibility when profits are drawn. They can also protect the existing business against risk from business failure if things go wrong.
• Are all family members using their basic rate tax bands – if not, could they be involved in the new venture?
• Some business set-ups will be loss making in early years – this can be a disadvantage where the new business is not part of the existing business, as the losses may need to be carried forward until the new venture turns a profit. Where it is part of the existing business, it is likely that losses in one area can be offset against income from another.

VAT

• Is the source of income VAT exempt? If yes, this could have an impact on VAT recovery and what is known as the partial exemption calculation for the main business. In a nutshell, it could mean less VAT being reclaimed than otherwise.
• If the new enterprise is a taxable supply – for example, it charges VAT on what it supplies – does this make it uncompetitive? For example, B&B income is the supply of accommodation and catering and if aggregated with a main (VAT-registered) business, it will have to charge 20% VAT. Having different business owners to the main business can help, but beware of HMRC “disaggregation” rules which are there to prevent artificial separation of businesses.

Capital and finance

• All new ventures require working capital. How this will be provided – either internal family loans, or external finance through the bank or other source – and what pressure might it put on the rest of the business?
• A separate bank account m ay be required for the new business if under different ownership. In any case it is always good housekeeping to keep transactions separate and transparent, not only because it may be a requirement but also so that the new venture and its contribution can be properly costed and monitored.

Engaging the next generation

• Is this a project to get the next generation engaged in the business? This could give great first-hand experience and autonomy, again making use of basic rate bands.
• Separating businesses can also be helpful for succession planning, particularly where the next generation has different interests or career directions.

Employees

• How is any labour for the new venture going to be set up? Is there going to be a cross charge if they are employed by the existing business? A separate payroll may be required, depending on the structure.
• Pensions auto-enrolment also needs to be considered if they are employees of a new venture.

Insurance

• Make sure you update this to cover assets and risks in any new business.

Record keeping

• If you are establishing a separate business, the records should be kept separately. You will need to consider the size and complexity of the new venture – will you need a separate software licence for customers.