The Accidental Smallholder Forum
Community => Coffee Lounge => Topic started by: arobwk on December 11, 2017, 09:27:05 pm
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I have a specific question (at the end this post), but thinking some intro' points will negate need for "what are you doing" queries:
Bought 3 hectares in 2015 fully intending to turn into a profitable business, i.e. a combo of wholesale trees (horticulture), short-rotation coppicing (agriculture), premium annual crops (agri v hort to be determined); I am already registered as a sole trader (gardening/grounds maintenance); I also have just enough other taxable income (or I wouldn't be able to do this!).
I won't be trading produce from the land for a few years to come, so all associated costs are excluded from my tax returns for now; I'm keeping all pre-trading receipts & I'm logging my "land-hours" & actual field-work; I'm fully aware of the HMRC's "hobby farming" criteria.
To the nub; I'm trying to format my biz records to hopefully ensure that, come trading-day, they will meet muster. (I really cant afford an accountant/tax advisor to assist right now.) I'm hoping others who have gone through this loop (hoop) might be able to offer advice from their experience. I might add a question or two to this thread along the way (and maybe others might add a question or two also), BUT for now, just one question:
I can't work out how to account for new agri/horti fencing costs. Because 'permanent' new agricultural/horticultural fences are attached to the land, are they deemed to become part of the land (and therefore cannot be claimed as a capital cost until the land is sold) or are they a fixture which can be claimed as a capital allowance under plant and machinery at (in my case) the point of trading?
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The rest of your post isn't relevant to the question on fencing.
Individually the posts are bits of wood - write them off in the year in which bought. Same goes for the wire an any tensioners. They aren't a complete entity
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Thank you for your thoughts doganjo. I quote and respond below:
The rest of your post isn't relevant to the question on fencing.
I accept your point above, but, as I said in my original post, I might be adding other questions under this topic in due course; hence the introduction/background.
I believe, though, that a new fence does not equate to just bits of wood/wire/tensioners: of course, repairs to an existing fence would, as you say, equal just bits of wood etc (i.e. expenses rather than capital cost).
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Mine have gone through as 'running expenses', not really an asset as no resale value?
not explained very well, hope it helps.
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Who says it's new? Tax man doesn't ask for before and after photos ,...unlike glastir grants.
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I had exactly the same debate with my accountants, and it was utterly frustrating. Their view was that a new fence did not attract capital allowances because it was attached to the land. I said 'ok, let's just put it through as revenue then' (which seemed like common sense to me). Their reply then was 'no, if capital allowances can't be claimed, then basically nothing can be claimed (I still don't really get that).
In the end, we agreed that since the new fencing had replaced existing fencing run along the same route then this could be classed as a repair. Meanwhile, since the sheep fank (the only really new thing) consisted of metal gates which could reasonably be taken off their hinges and sold second hand, that element could be claimed as capital.
We had the same argument a year later about drainage work, and whether digging up clogged clay field drains and replacing them with plastic perforated pipe could be counted as a repair or not, because it was not like-for-like. In the end I just said 'look, if perforated pipe had been available, you can be bloody sure the Victorians would have used it!', and that seemed to be good enough.
I'll be honest though, the whole thing just seems utterly confusing, and that's before the pressure of trying to make a profit on what is at best a pretty marginal business. The moral for me is get a specialist farm accountant who really knows their stuff. I would have saved myself considerable hassle and uncertainty if I had done that.
I'd say do what you plan to do, and keep records exactly as you have been doing (log the VAT element of expenses separately too, as that will be useful information). Then when the time comes to start trading, just claim what is allowable. Worrying about what is and isn't going to be ok is hassle you don't need right now, basically beware the of the tail wagging the dog....?
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A number of accountants I've spoken to are very woolly on what is/isn't an allowable expense and how it should be presented in the accounts. Finding out about reclaiming VAT can be very useful as it'll all be outgoings for you at the moment. I'd just advise that whatever you do you have a watertight paper trail to support it.
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Thanks all for your comments.
I'm beginning to wonder why accountancy isn't classified as a "creative art" rather than a profession.
Womble's debate with accountants (re fencing) sort of confirms my fear that new fencing is 'technically' dis-allowable until sold as part of the land it's attached to. Clearly need to put my 'arty-head' on when completing my 1st tax return for the 2nd business!! That said, I shall be trying to offset costs against overall income-tax liabilities and, hopefully, reclaiming some previous tax paid, so best not to over-egg in case the fully-loaded new-biz tax return catches an eye at HMRC. However, perhaps I will be able to afford a creative artist by then to submit my tax return for me which, I imagine, will provide some additional credibility.
Unfortunately, Backinwellies, there is evidence, thanks to Ordnance Survey, that my new fence is a new feature!: I'm not going to push my luck too far.
And, Womble, I acknowledge your point about not worrying too much: however, I'd still like to think that, come 2-3 years time, I'm ready and do not have to go back through years-worth of costs to assess what is or is not allowable.
Thanks again - any further comments obviously welcome.
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New question: can anyone recommend any books specific to agricultural accounting?
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I would have thought any costs you have incurred to run your business would be taken against your business profit at your year end and then you only pay tax on the remainder of your profit.
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Yes, you would have thought...... but it's not quite as simple as that!!
In essence, yes, the costs incurred are taken away from the sales made, and what's left is your profit ( :roflanim: ), which you then pay tax on.
However, certain items attract 'capital allowances', which mean that the cost is spread over several years for tax purposes. I would love to be able to explain this simply, but ??? . So, if anybody else fancies having a go, I'm all ears!! ;D
Arobwk's situation is also made complicated by the fact that they're incurring business costs now in preparation for beginning to trade, and will only start trading in future years. Most costs like that can be claimed in retrospect, but if you register for VAT, there are some complicated rules about what input VAT you can claim back from before trading. Again, it's one thing to know they're there, and quite another to explain them!!
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A quick google search comes up with several promising looking books eg https://www.abebooks.co.uk/9781418038342/Introduction-Agricultural-Accounting-Barbara-Wheeling-1418038342/plp (https://www.abebooks.co.uk/9781418038342/Introduction-Agricultural-Accounting-Barbara-Wheeling-1418038342/plp)
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Costs incurred now set against nil income creates a loss.
Losses are carried forward to future years.
So a return should be made dating from the date you moved onto your smallholding/farm/croft (July 2015) up to the date you decide to make your 'year end' (For instance 5th April 2016 neatly coincides with the tax year)
Your return will show a loss for that year.(you can submit a back dated return)
When submitting your return for the following year ending 5th April 2017, there is a box on the return to enter that loss. You may now have an increased loss.
You should do the same for the year to 5th April 2018, entering the new increased loss on that return.
I general HMRC accepts that most normal business would be 5 years before making a profit
HTH
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Yes, you would have thought...... but it's not quite as simple as that!!
It's all a little bit simpler, though, if one has elected for accounting/tax return on the "cash basis" rather than accruals basis, but cash basis does not, as I understand it, allow offsetting any losses against any non-trading income for tax purposes. There are other limitations with cash basis which I cannot recall right now: that said, seemingly a high proportion of farmers choose the cash basis. One reason might be that it avoids the need to value inventory (live-stock or produce, including direct costs associated with their husbandry/production) held at the end of the FY: the value (inc costs) of inventory to be carried forward to the FY in which sale or disposal is achieved. I have yet to work through the pros and cons of cash basis versus accruals in my circumstance, but until I advertise produce for sale, I am not trading so a bit of time to work things out.
I could probably put together a summary of cap' costs and allowances if you are really interested Womble.
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A quick google search comes up with several promising looking books eg https://www.abebooks.co.uk/9781418038342/Introduction-Agricultural-Accounting-Barbara-Wheeling-1418038342/plp (https://www.abebooks.co.uk/9781418038342/Introduction-Agricultural-Accounting-Barbara-Wheeling-1418038342/plp)
Thanks Buttermilk. Quite pricey, but I guess there is the option of requesting the library to get me in a copy. (Can't remember last time I crossed its threshold)
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Costs incurred now set against nil income creates a loss.
Losses are carried forward to future years.
So a return should be made dating from the date you moved onto your smallholding/farm/croft (July 2015) up to the date you decide to make your 'year end' (For instance 5th April 2016 neatly coincides with the tax year) ....
... In general HMRC accepts that most normal business would be 5 years before making a profit
Doganjo, I'm thinking you were thinking about cash basis for your #13 post, but, more importantly, I imagine you were assuming some amount of produce actually being advertised for sale (whether or not sales were achieved) by the end of the tax year following occupancy. And then there is the soft "5 yr guideline" regarding profitability that you mention.
In the round, it got me wondering how many members have ever been challenged by HMRC about profitability and "hobby farming". Anyone?
[Given the number of tax returns HRMC has to deal with, I do wonder how they select individual returns to be queried/tested: seems reasonable to assume they will be focused more on big tax payers, but they must surely have a "tombola" system at least for picking out a proportion of minor tax payers !?]