The AHDB (Agriculture Horticulture Development Board) has some very admirable goals
For example:
“Inspiring British farming and growing to be more competitive and resilient in a rapidly changing world.”
The AHDB Client Strategy Office Tom Hind also has ideas so that farmers will be more self-reliant for the post Brexit period. Mr Hind said that farmers should ensure they:
Such suggestions are very much welcomed by the accounts, tax and legal advisers to the farming industry.
A ‘five year business plan’ would be much welcomed by the accountancy profession who find that many farmers still produce unreconciled manual records and have not been producing any business plans.
Such a suggestion would be welcomed by all farm advisers as there are so few Wills, partnership agreements and tax planning strategies in place. If there is no partnership agreement for the business then the Partnership Act 1890 comes into play when one partner dies and the old partnership ceases. There are also inadequate partnership agreements with no provision for retirement or death.
Ham v Bell and Others [2016] EWHC 1791 (Ch) shows the importance of accounts in partnership disputes. The key point of whether the farm was partnership property was the intention of its original owners, Mr and Mrs Ham. It was decided that accounts were no more than evidence and, if they did not reflect what was agreed, they could be disregarded. The case shows the need for accountants to ensure that the accounts reflect intentions and they should, if necessary, ask the clients to take legal advice on this.
Whilst Ham v Bell dismisses the accounts as “no more than evidence”, they are still evidence of intentions. The majority of farming operations trade through the legal entity of a partnership. It has also been said that a starting point for the understanding of acting for farmers is that, almost inevitably, disagreements among partners will arise. It is, therefore, commonplace that individual partners will dispute aspects of the treatment of the partnership business accounts and tax issues and the accountant must be prepared. Some would argue that farmers should check more on their understanding of accounts.
The proceedings concerned a dairy farm in Somerset of around 900 acres, which were partly owned and partly rented by the second and third defendants, RH and JH (together, the parents). The parents carried on business in a partnership (the old partnership). The first defendant was the parties’ land agent. In 1997, the claimant, who was the son of the parents, John, was made a partner in the family business. A written partnership agreement was created for the new partnership. A dispute arose as to the extent of the partnership ownership of the farm.
All farm accountants must consider whether the farm is or is not a partnership asset.
The central issue was whether the farmhouse, the buildings and the land (together, the farm), as of September 1997 when they had been assets of the old partnership, had become assets of the new one on 1 October 1997, because of their appearance in its accounts between 1998 and 2003.
The defendants argued that the inclusion of the farm in the accounts for that period had been an error, which had been rectified in the accounts from 2004 to 2008. They submitted that they had never intended to make the farm an asset of the new partnership, ie it was not a partnership asset.
The claimant contended that an implied agreement was to be inferred from the conduct of the parties. Among other things, the claimant relied on the accounts of the new partnership between 28 February 1998 and 28 February 2003, none of which had been signed in manuscript by the parties. Consideration was given to the conduct of the accountants who had drawn up the accounts.
It is important to note that none of the accounts had been signed. It is key to ensure that there are meetings with the accountants and the clients and if necessary not only the accounts should be signed but also a ‘letter of representation’ for full understanding.
Full meetings with clients and notes of meetings must be kept. There was no evidence that any discussion had taken place between the accountants and the claimant or between the accountants and the defendants about whether the farm had become a partnership asset. Such discussions must take place. On the evidence, the accountants had continued to prepare the accounts after the new partnership started in the same way that they had always prepared them beforehand, but without giving any proper thought to whether the farm was or was not to be an asset of the new partnership. The key here is that all questions on partnership status must be answered. It was likely that the accountants had not thought that there had been an agreement to make the farm a partnership asset.
By mistake the accountants had continued to show the farm as an asset of the new partnership. That had been an error because, on the evidence, there had been no agreement between the parties that this would be the case. That mistake had been corrected in the 2004 accounts and the correction had been duplicated in the accounts for the following years – there should have been greater clarity. If the land is remaining as an asset of the partnership balance sheet then correct use property capital accounts should be used clearly showing the ownership of the property between the partners.
Many errors take place within the accounts which can have devastating impacts on amounts due to each partner and inheritance tax (IHT). Some accountants do not realise that three sets of accounts are submitted with each IHT400 on the death of a farming partner. Incorrect disclosure in the accounts can therefore impact upon the IHT400, the probate valuation and the general IHT position of the farming partner who has died.
It is therefore wrong that some farming accountants say “I don’t do IHT”. The statement should instead be: “I don’t do IHT so therefore I must recommend you to an IHT specialist and/or an agricultural solicitor who can help you”.
Some accountants will disclose genuine trading operations as a “let” or “quasi-let” position. For example:
- A genuine contract farming or shared farming receipt shown incorrectly as “net rents received” or net amounts received.
- A genuine serviced livery income stream shown as “stable rents received”
The private usage element is key where for example a large farmhouse has all the expenses put against property income. Likewise, where the costs of garden and grounds are offset against farming income. Often the expenses can be for staff who work on the garden and grounds and the farm. Likewise the suppliers of the garden and farm maintenance material are shared. Such private expenditure can be vital where the farm is perhaps held in a trust and the difference between capital and income is very important.
Disputes in this area are commonplace. Sending out capital accounts analysis and schedule of drawings for each partner to approve is key. Problems that are encountered can rest with instructions to the accountancy firm from one dominant partner.
If there are such disagreements, the tax advisers must consider conflicts of interest. This is especially so when, for example, an accountancy firm acts for the partnership and the partners. In such a case, can the partnership adviser act with independence for all the individuals, particularly if there is a dominant lead partner for whom they act? In a case such as Ham v Bell, at what point does the accountant decide whom they can and cannot act for? The assumption is that this should be at a very early stage in the dispute or indeed in anticipation of the dispute.
One example could be where one farming partner draws out more than the other partners and is the “lead partner” and the firm of accountants act for this person and his family personally. The accountants do not see the conflict potential and take a “lone instruction” without copying in other partners that all drawings should be divided by the number of partners. This is a very “old-fashioned” way of producing accounts and is incorrect. In recent years it has caused disputes within partnerships when the facts are fully revealed.
Also on probate the capital account of, say, a bachelor who did not draw much money will be incorrectly suppressed for their beneficiaries.
The full implication of the farm accounts against the background of high farm values, elderly farmers and insufficient recording and protecting is welcome.
All farm advisers should applaud the AHDB to encourage awareness of all these points. It is key that farmers are made aware of the importance of fully understood accounts and legal documents. Improved records with the move to Making Tax Digital (MTD) and the deaths that will arise within the farm partnerships are key to both a smooth succession and a full understanding of the trading position.
There is nowhere to hide – farmers and their advisers must move with the times.
The completion of the land and property pages when preparing the tax return should be used as part of the interactive review.
The Inheritance Tax Manual gives clear guidance that a weak grazing agreement can jeopardise the claim for agricultural property relief on the farmhouse. At IHTM24074 (“Occupation: Definition of a lease as opposed to a licence”), the manual states: “The terms and practical operation of a grazing licence agreement will determine the fundamental question as to who is the actual occupier of the land for the purposes of assessing compliance with IHTA 1984, s 117. It is therefore important to obtain as much information as possible about the terms and operation of the licence in order to correctly assess their provisions.”
The key time to “obtain as much information as possible” is in the production of the accounts that support the fact that a trade is being carried on, if that is the case, or the simple inclusion of the income on the land and property pages. This is a very clear reminder of the power of the land and property pages and the need to ask: “Is this the right disclosure?”
Review all land and property page entries to ensure that the correct disclosure has been made in respect of the land. Likewise, include a “capital taxes protection” checklist with the preparation of every income tax return that cross references land. The tax return is part of the evidence to support claims for inheritance tax and capital gains tax and the preparation time is the ideal moment for the interactive “fact find”.
The capital taxes protection on the land and property pages of the tax return is:
The key point is determining whether trading assets and trading profits have been incorrectly included on the land and property pages?
In understanding the protection of capital taxes, all leases and licences should be understood.
Supplied by Julie Butler F.C.A. and Lucinda Knighton ACA MAAT, Partner – Farming & Equine Department, Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH. Tel: 01962 735544. Email; j.butler@butler-co.co.uk or lucy@butler-co.co.uk, Website; www.butler-co.co.uk
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).
Farming & Rural Business Community, December 2018