Stuart

Private client law and tax, Fellow of Agricultural Law Association. All views personal and subject to change based on evidence.

[Stuart @StuartMaggs]

#FamilyFarmTax talking points - a helpful guide:

1. "It's only 500 farms". No, that's APR claims above £1m made in one year, 2021/22. Many more people than that are affected by the rules. The CLA estimated the total number is 70,000 farms. On the Government's own numbers it's about 16,000 (500 x one generation of 32 years). The true figure is that it's likely tens of thousands are affected.

2. "There's a £3m exemption". No, that only applies if both spouses are alive, they can split the farm between them, they amend their wills before dying, both they are their children are in stable marriages (or they are prepared to use complex trust structures). It will not be possible for all couples to achieve this.

3. "Family farms are protected". No, DEFRA says the average family farm is 217 acres. At £11,300/acre that's £2.45m. Together with equipment and a farmhouse, that's likely well over £3m which is the maximum level of the exemption. Farms well below that level are affected and will need to take steps to restructure the way they are organised or face inheritance tax bills when the older generation dies.

4. "How can your income be that low? The price of land must be high because of tax avoiders." The current 100% exemption for land and businesses have applied since 1992. The price of land didn't start to rise significantly until 2005, when the Single Farm Payment was introduced. Tax rules only have a minor affect on land value, which is driven by multiple factors including development, rollover relief, environmental needs, and that they're not making more of it

5. "This only affects the very wealthy and tax avoiders" At one end lifestyle buyers may well be within the £1m exemption per person, at the other the very wealthy can still plan by making gifts. The people who cannot avoid it are family farmers who need to retain access to the farm income.

6. "Wealthy farmers can just pay their fair share of tax" An average farm income is about 1%. Even if you pay over 10 years, the inheritance tax payments will often take all the income, and so part of the farm will need to be sold. This reduces efficiency and makes the farm less viable for the future.

What have I missed?

[Stuart @StuartMaggs]

Hi Matt. Imagine receiving a tax demand from HMRC relating to profits that you haven't earned yet. You're in a seasonal business, and you earn your profit between October and March. Between April and September you are deep in your overdraft having bought stock, still paying the rent and staff, but sales peak at the end of the year.

Now, rather than paying your tax in January next year when the profit's in, it's being demanded from April when you haven't earned it.

You have to borrow to pay the tax. The overdraft increases and you're paying interest on it. The bank is worried about the level your borrowing and calls you to have a meeting. It's not looking good for viability.

Is this what you're welcoming?

The current system allows business to earn the profit before they're taxed on it. The new system risks taxing them before they have the money. That's why it's a bad idea.

[Stuart @StuartMaggs]

@Janetsm10441997 @barbedquill No, it would be June one quarter of annual profit, September one quarter of annual profit, etc

[Stuart @StuartMaggs]

The hidden tax measure in the Budget is huge for people paying tax under self-assessment - sole traders, partners, landlords, retired investors.

For 6th April 2028-29, you currently pay 50% of your income tax late in the tax year in question (in January 2029), 50% just after the year end (in July 2029) with any make-up payment in January 2030.

Under the new proposals you will pay your tax perhaps monthly or quarterly (TBC) from April 2029 onwards. A rough analysis suggests the impact is to draw about 50% of your tax bill forward, a huge cashflow boost to HMRC and a significant funding issue for the self-employed.

The Treasury recognises this, and expects to raise £1.3bn of additional tax in 29/30 as a result of this change.

The cashflow impact of the accelerated charge will send some businesses to the wall.

[Stuart @StuartMaggs]

@barbedquill I’ve mentioned it elsewhere plenty of agricultural businesses don’t start making real profit til October, and retail in December. How many businesses have 50% of their profit in the bank at half year? None?

[Stuart @StuartMaggs]

That’s not the issue I’m concerned about. If the smoothed payments don’t kick in til January then it’ll probably be fine. But if they start in April, very few businesses have received payment for the work in April by April 30tb. Plenty of businesses don’t actually become profitable for the year until October or December.

If HMRC starts demanding one twelfth of your total tax every month from April, then the cashflow hit will cause a real problem.

[Stuart @StuartMaggs]

@barbedquill This measure provides the potential to levy the before you have the cash. That means you have to borrow (or use savings if you have them) to fund tax before your clients have paid you.

[Stuart @StuartMaggs]

@of_wonk Not necessarily, and possibly not at all depending on how it is structured. If one twelfth of your tax is due in April, how many businesses have received the cash on their invoices by the end of that month?

[Stuart @StuartMaggs]

Following the proposed changes to payment of tax under self assessment, I've tried to model the potential real world impact on sole traders and partners. It's not easy because life is complicated.

Many businesses don't have a great first half of the year, making most of their profit from October onwards. These are going to suffer the worst - being forced to pay tax on income they haven't even earned yet.

There will also be a painful transitional year, although the Government is considering ways to soften the impact without changing the overall effect.

Some relatively modest changes, like paying tax monthly with a 3 month delay, could make a big difference to whether businesses can cope.

The Government has stated it is continuing to work with stakeholders on the timing and frequency of payments. It should accept that the natural business cycle means demanding tax on income before it is earned would be wrong, and any change to current rules must accommodate that commercial reality.

https://t.co/98XIoH2gRQ

[Stuart @StuartMaggs]

@IainDale You should ask him why, under the new "timely payment of income tax rules" the Government is intending to make people pay income tax before they've earned the money they're being taxed on.

[Stuart @StuartMaggs]

@LaveenLadharam You have money and the Government wants it?

[Stuart @StuartMaggs]

The new changes to drag forward income tax charges mean that many if not most people will be paying income tax on money they haven't earned yet.

Very few business have 1/12 of their profit available to distribute in April. Even if it's quarterly, how many businesses have 1/4 of their annual profit in the bank by the end of June?

If the Treasury knew anything about seasonality or billing cycles, they'd never have proposed this change.

[Stuart @StuartMaggs]

@GailH99164549 No, but the cashflow hit to businesses, especially seasonal ones like farms, retail, etc., will be enormous. It means they'll have to pay tax on profit that isn't earned until months later.

[Stuart @StuartMaggs]

@KanishkaNarayan @JohnHealey_MP @dantomlinsonmp @LucyRigby @hmtreasury This is not true. The Founders Relief is, on the Treasury's own figures, going to impact barely a few hundred people every year. It is a niche irrelevancy to British business.

[Stuart @StuartMaggs]

If you see anyone comparing the reduction in BADR (slashing the benefit of this relief from £140k to only £30k per person under this Government) with the new Founders Relief (for which practically no-one will qualify), then they haven't read the Budget briefings carefully enough

[Stuart @StuartMaggs]

@wealthagent The proposal appears to be, perhaps, you pay 1/12 of your tax in April, May, June, etc. based on last year's earnings. The hit on cashflow will be enormous.

[Stuart @StuartMaggs]

Proposed “administrative” change to self assessment will have a big hit on farmers, investors and the self employed from 2029. It appears HMRC wants to accelerate the payment of self assessment tax meaning these people will have to find their tax payments earlier, and potentially on money they haven’t even earned yet! Great for HMRC’s cash flow, much worse for the people having to fund cash earlier.

[Stuart @StuartMaggs]

@RobLEvans @rcolvile The proposal is that HMRC will take the additional tax from your PAYE income monthly, according to the consultation.

[Stuart @StuartMaggs]

@saintdiamond1 It's a potential saving of £1.4m per person. That's not going to keep any tech bro anywhere!

[Stuart @StuartMaggs]

I can't see evidence on this proposal of anyone who's run a business and understands how your bank balance and overdraft vary over the course of a year.

There was a consultation on it earlier in the year and a good report from the Telegraph.

It's framing it as an administrative measure when it's clearly a tax-raising measure that's particularly galling.

https://t.co/LLqeBK62QK

[Stuart @StuartMaggs]

@emilysheffield The Founders Relief looks to be a nonsense. Hardly anyone will qualify - even on the Treasury's figures the cost to the Treasury is based on perhaps a few hundred people every year at best.