Farming and land use has changed over the years, with greater emphasis now placed upon the delivery of environmental objectives and, in the future, climate change mitigation and carbon sequestration will feature.
According to the Defra Evidence Compendium, 66% of farm businesses in England in 2017/18 included some form of diversified activity, generating around £680m additional profit (£18,700 average per farm). For those farms with diversified activity, their income from that activity accounted for 28% of their profit in 2017/18 and 22% of farmers' total income was derived from some form of diversified enterprise. With the UK's exit from the European Union and the consequent changes in agriculture policy, there is a need for farming businesses to adapt, increase productivity, seek new markets, change land use and diversify to add additional income streams to support farming operations and continue to make a fundamental contribution to a thriving rural economy that makes a proper contribution to the Exchequer.
The wider economy of rural areas – including tourism - depends upon continued stewardship of the countryside. This cannot be provided by traditional agricultural businesses unless they are both profitable and can deliver the future environmental management of the countryside for the public good.
Proposal for taxing diversified rural businesses
- A business that undertakes agricultural, environmental, forestry and/or heritage activities with other interdependent commercial activities can elect to be taxed as a single business entity (the Rural Business Unit)
- To qualify to make the election, the business needs to meet the qualification tests: activities (agricultural, environmental, forestry and/or heritage); management; size and income.
- The effect of the election is that every commercial economic activity is treated for tax as a single business unit and that business is a trading business for tax purposes.
Our proposal is designed to ensure the Rural Business Unit provides flexibility for land-based businesses to embrace not only all those commercial activities traditionally associated with agriculture or heritage but also new commercial and environmental activities that are constantly being integrated to provide further sources of income, employment, which also increase biodiversity and mitigate climate change.
To protect against possible abuse, however, we have proposed that certain qualifying tests should be applied with the object of ensuring that only those activities that are integrated and which create a self-supporting entity are eligible for inclusion within the Rural Business Unit.
We believe that our proposals will allow greater freedom of investment within rural businesses leading to productivity growth and more tax paid to the Exchequer, more income available for environmental protection and conservation, and more jobs. The administration of our proposed system would be a simplification, saving time, both for HM Revenue and Customs and for rural businesses. Over the long term, we would expect this proposal to be at least cost-neutral.