Diversification: financial things to consider

Accountancy : Ensors

Although recent announcements regarding rewards for Environmental Management will help, these changes become ever more important as the continued reduction in the annual Basic Payment starts to cut deep into farming finances.

Decisions need to be made over what form this diversification will take, but often it involves services to the general public, particularly for tourism and leisure.   My experiences with diversified businesses are clear, that success only stems from a business where the proprietors have a passion and enjoyment for what they do; half-heartedly set up businesses will frequently fail.  

As well as the decisions over what the diversification will consist of, there are the usual hurdles of local planning and funding constraints, and the potential tax impacts of the diversification.

Types of company

The mode of operation needs to be considered.  Many diversified enterprises are administered through limited companies that were either created from the outset or after the early years of operation. Limited companies generally pay a lower rate of tax on their profits in comparison to sole traders or partnerships, but extraction of funds for the proprietors’ own needs will impact on the overall tax charge of the operation.

Taxation considerations

Capital Taxation is an important area covering both Capital Gains Tax and Inheritance Tax.  Generally, the exposure to these taxes is reduced where the diversification consists of conducting a trading business (e.g. buying and selling) or some form of activity (e.g. a leisure or tourism activity), as opposed to something considered more along the lines of an investment activity such as rental generation, or any passive holding of assets. It is becoming more apparent that some of the Capital Tax benefits currently available could be reduced, or removed, with either a change in thinking of the current Government, or indeed on a change of Government in the years to come.  As a result, increasingly more farming families are looking to ensure that property assets are moved to the right generation of the family as soon as possible.

It follows that early thought should also be given to which generation of the family will run the diversified business and whether property should be passed between generations to facilitate the business operation.

Transparency and openness

Bolting a diversified enterprise onto a core farming business has clear advantages, particularly where two or more elements of the business complement each other. With most rural businesses, succession is generally a key issue to consider, and this can be more difficult where we have different and diversified elements to the overall activities of the business. 

Fundamental to effective succession will be early planning and open and frank discussions with those involved.  Complete financial fairness in terms of equality of capital values cannot always be achieved and this is often the most difficult factor to overcome, but early dialogue is key to avoid disputes later on. 

Finally, VAT will need some consideration. Diversification can create some significant issues over recoverability of VAT and on pricing to the consumer, but with careful planning, the financial effects can be minimised.