Any landowner applying for the new basic payment scheme (BPS) will have to satisfy the active farmer test. The starting point is that BPS payments will not be made in relation to:
- A negative list of five business types – airports, railway services, waterworks, real estate services and permanent sport and recreational grounds. DEFRA is yet to provide detailed guidance on how these terms are to be interpreted but there is some suggestion it will be necessary to consider listed activities carried on anywhere, not just from the holding in relation to which BPS is being claimed.
Farmers may still be able to claim BPS if they satisfy any of the ”readmission” criteria which are essentially designed to ensure the farming activities are significant.
The introduction of the active farmer test is a timely reminder that a farming business must be carefully structured to ensure it, or the assets used in it, qualify not only for BPS but also for valuable tax reliefs.
HM Revenue & Customs continue to scrutinise claims for agricultural and business property reliefs from inheritance tax. Securing business property relief is becoming increasingly important as the non-agricultural value attributable to land increases. To qualify for business property relief, the business must be a predominantly trading business. Various other tax reliefs such as entrepreneurs’ relief and roll-over relief also depend on the relevant business being a trade carried on with a view to making a profit.
The availability of BPS and tax reliefs are often vital to ensure the business remains commercially viable and that it can be preserved for the next generation.
We are aware that the RPA has been issuing single business questionnaires (IACS 26), presumably to help tidy up their database in readiness for BPS. These questionnaires are designed to identify whether two or more businesses, which involve one or more of the same individuals should be amalgamated for the purposes of claiming SFP/BPS. The forms include a number of tick boxes, although there is room to provide more detailed explanations regarding different aspects of the business.
It needs to be borne in mind that the RPA is responsible for implementing European regulations, which are not geared towards trusts and partnerships. Particular care should be taken when completing IACS 26 in circumstances where the business is a partnership, or involves trustees. We have recently been in correspondence with the RPA’s policy team on behalf of an Estate which is farmed by more than half a dozen separate businesses, many of which involve trustees. We obtained the following clarification:
- In circumstances where an individual has a “controlling” interest in two or more businesses, those businesses will be treated as a single entity.
- “Controlling” means, in the case of a company, more than 50 per cent of the shares. In the case of a sole trade, this will clearly be controlled by the business owner.
- In the case of a partnership, the RPA appear to look at the income profit sharing ratios. For example, if a partner is entitled to 70 per cent of the capital and capital profits in the partnership but he is only entitled to 50 per cent of the income profits, he will not have a “controlling” interest.
- Where the trustees of two or more settlements are the same individuals, it is the identity of the beneficiaries and not the trustees which is key.
- The RPA initially asserted that, where the trustees of two or more settlements are the same individuals, and in relation to each settlement the trustees effectively carry on business as a sole trader, those businesses should be amalgamated. We did not consider this analysis to be correct. The identity of the individual trustees should be irrelevant. The key issue (if any) should be the identity of the principal beneficiary or beneficiaries. It should not, therefore, make any difference that two sets of trustees, with different beneficiaries, are identical.
- The absurdity of the RPA’s position was highlighted by the fact that they appeared to conclude that if the trustees of Trust 1 were A, B and C but the trustees of Trust 2 were A, B and D, the two businesses would be treated as separate entities.
- The RPA ultimately accepted that Trust 1 and Trust 2 would not be amalgamated where the trustees were the same individuals provided the assets of each trust were held for different beneficiaries. An overlap in beneficiaries is not necessarily problematic but the precise trusts and beneficial interests would need to be considered and explained on a case by case basis.