In the tenth of its half yearly surveys of attitudes in the farming sector, MHA asked a sample of visitors at the Lamma event on 8th-9th January how they felt about various current issues.
The survey follows on from similar sampling at Lamma and Cereals over the last five years and on this occasion includes responses from farmers occupying well over 50000 acres.
The general “feel good” factor which had been identified over the last twelve months continued to be present. Once again, when attendees were asked for a prediction of business growth in the next 12 months, two thirds felt that there would be moderate or high growth in their businesses this year. This was a slightly higher proportion than had been the case at Cereals six months previously. Strangely, the level of optimism at Lamma has often tended to be slightly higher than at Cereals – possibly because harvest results are known and the level of uncertainty is lower.
We have once again compared the trend lines for optimism with those for the wheat price. While there is a broad correlation, there are also some points of divergence and the connection is by no means clear. This suggests that the key output price is not the only driver for the feel good factor, which may also reflect other issues such as weather and political events. The lowest level of optimism over the period was just before the 2016 referendum.
Respondents were asked for their concerns over the next twelve months. The responses are remarkably close to those given at Cereals six months previously. Despite a continuing steady increase in cereal prices, pricing is clearly still an important issue with 35% seeing it as their biggest worry, marginally down from the 38% at Cereals. Cashflow was the second biggest worry, being the key issue for 30%, up from 23% previously. Clearly the two issues are interrelated and in aggregate indicate that financial pressures are a source of concern for almost two thirds of those asked. Inheritance tax continues to worry some 17% of respondents, much the same proportion as at Cereal.
Other concerns such as funding machinery replacement and availability of land are still important issues, but once again it is the short-term financial issues which are at the top of the worry list.
Succession planning is always a key discussion point, and the proposals for wholesale reform of the subsidy regime announced a few months before the event might have been expected to push this to the fore. In fact the respondents showed very much the same levels of concern as they had in the past, with slightly fewer being “greatly concerned” but almost 70% having at least some concern. As the implications of the Agriculture Bill begin to become clearer in forthcoming months we would expect thoughts to become more focused on this area.
As usual machinery purchase is one of the main reasons for attendance at Lamma. Attendees were asked to rank various reasons for machinery purchase, and once again greater efficiency was plainly the key driver with 62% giving it as their main reason for purchase. Other factors such as expansion, planned replacement or tax incentives all lagged well behind.
This point may have come as something of a surprise to accountants, who are frequently consulted on the tax efficiency and timing of machinery purchase, but the conclusion seems to be that the decision to buy is made on the grounds of efficiency. The accountant’s view on tax efficiency is then used as an endorsement for the decision rather than the driver. This view is reinforced by data released by DEFRA at the end of 2018 showing the amounts invested by the industry in recent years. Clearly there is some correlation between the amounts spent and the financial health of the farming industry. However, if one plots the capital expenditure, total income from farming, and the level of tax incentives as indicated by the level of available 100% allowance, it is clear that while there is a loose correlation between total income from farming and the level of investment, there is virtually no such linkage with the level of available tax allowances (the chart shows national TIFF and Capex in £Bn and individual farm AIA in £000).
As usual, the survey provided an opportunity to gather information on other topical issues. We were pleased to hear that 43% of respondents choose their accountant as the first person to call when advice is needed (compared to 10% talking to their solicitor, 17% talking to an agricultural consultant and the balance either speaking to their bank manager or to another adviser). Accountants have an advantage in this area since they will always see their clients at least annually as a matter of course, whereas the other advisers will tend only to be called for a specific purpose. However, irrespective of where the advice comes from it is good to see that virtually every respondent had at least one professional they felt they could turn to for guidance when needed, and particularly gratifying that the accountant is frequently the first person to receive the call.
We believe that the regular contact which builds up between accountants and the farming family over the years make them uniquely placed to advise on not only the financial and taxation consequences, but also the longer term implications for the business and the family over many years. At a time when succession and profitability are such big concerns for the UK agriculture, the role of the specialist agricultural accountant has never been more important.
By the beginning of January it was clear that Making Tax Digital (or at least, Making VAT Digital) will be happening in April. One of the supplementary questions asked how far respondents were aware of the change, and whether their bookkeeping systems would be appropriate. On the first question, 74% of those asked were aware of MTD. This is well up from the 54% at Cereals but still a matter of some concern when the implementation date is only 3 months away. Of perhaps greater concern, 38% of those asked were still using manual accounting systems which, by definition, will not be acceptable in a digital environment.
This is both surprising and alarming, given the amount of publicity, government advertising and information from accountants and others which has been circulating. Once MTD for VAT is introduced there will be a penalty regime, which will start softly but ultimately will enforce compliance with stiff penalties. Ignoring this problem will not make it go away.
Finally, with a view to a new regime for agriculture post Brexit, the survey looked at joint ventures, machinery sharing, and contracting arrangements. Results here were broadly consistent year on year, with 7-10% of farmers sharing machinery (we suspect by formal arrangements rather than “helping out”), about 20-30% involved in contracting and 64% completely ignoring the cost saving opportunities of co-operation. These results are quite surprising. As the implications of the Agriculture Bill begin to bite over the next few years, it will be interesting to see how far these figures start to change.
Once again the survey provides a snapshot of the industry at a particular point in time. It shows continuing concerns about cashflow and pricing, despite significant increases in the market value of cereals crops in recent months. It shows that both government and professional firms are only partially succeeding in getting over the message that Making Tax Digital is imminent, but it still shows an industry which is cautiously optimistic.
The next few months will demonstrate whether the seismic changes outlined in the Agriculture Bill will come about, and will also reveal some of the finer detail behind the broad empowering provisions which we have already seen. It will be interesting to see whether these start to have an impact on issues such as succession and whether the threats to long term profitability will begin to show through in the optimism index. Watch this space!