Tax clarity needed on new environmental land management schemes

Matthew Waters
Mat Waters

HMRC needs to provide clarity about the tax situation surrounding SFI payments, says Mat Waters.

Mat Waters

This year sees the end of the Basic Payment Scheme (BPS) application process for farming subsidies, as the government looks to link support for farming with sustainability.  The Sustainable Farming Initiative (SFI) is already being phased in as part of a variety of Environmental Land Management Schemes (ELMS).

An HMRC consultation about how these new payments will be treated for taxation purposes has just closed, and the Revenue now has a decisions to make which will have a big impact on every many farming businesses.

The tax treatment of farming subsidies under the Basic Payment Scheme was just that: basic.  BPS payments were taxed as income in the relevant period, appearing in the farming annual profit and loss account.  In simple terms, the subsidy provided an annual income at a fixed rate to support the farming businesses continuing to produce agricultural goods.

However, the move towards ELMS not only sees the replacement of the BPS subsidy with incentives for more sustainable farming practices, but there will also be funding towards creation of new habitats or returning farmland to its previous state.

These new schemes will inevitably see arable farmland or livestock grazing land coming out of traditional production and used to generate increases in biodiversity and carbon capture.  This paradigm shift replaces the tried-and-tested farm margin models with some unknowns (is this still agriculture? Is the income revenue or capital?) which could act as a barrier to some landowners making business decisions, and potentially missing out on new, diversified income streams.

Despite suggestions to equalise capital and income tax rates, government has maintained CGT rates at lower rates than income tax.  So on the expenditure side, capital costs, especially in relation to land, are unlikely to attract the same levels of tax relief, if any, as those going through the profit and loss account.

So this change in policy must be backed up by clear and fair guidance on the accounting and tax treatment, so that landowners can review the benefits of each scheme through a financial lens as well as an environmental one and link their ongoing business plans to the governments pursuit of ‘public monies for public goods’.

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