As well as considering in which accounting period the grants should be recognised, businesses in receipt of such funds should consider the tax implications.

Income tax or corporation tax

From a direct tax perspective, it is important to look at what the money is being received for.

If it is to cover specific revenue costs, then from an accounts perspective the income is generally recognised in the profit and loss account in the same period as the costs are incurred.

For example, if the support scheme covers a one-off maintenance cost, the cost would all be reflected as an expense in year one and the income for the same amount would be recognised at the same time, therefore the overall profit/loss is nil.

In turn, this means the overall tax impact is nil.

Often though, where specific costs are identified in the agreement, these relate to ‘capital’ expenditure, i.e. expenditure which will result in an enduring benefit for the business. This might be, for example, the creation of a new orchard or concreting.

From an accounts perspective, support payments which relates to capital expenditure should still be reflected in the profit and loss account, but spread across the life of the asset, which may be up to 30 years.

This could be disadvantageous from a tax perspective, as often there is little tax relief available on capital expenditure on land, therefore the business could be left with taxable income in their profit and loss account, with no relief to offset against.

Fortunately, there is some relaxation whereby the tax rules can override the accounts treatment in this scenario, which allows the grant income to be treated as non-taxable trading income, and instead it offsets against any capital allowances that may be claimed (which often is low anyway).

This prevents businesses being disadvantaged from a tax point of view by accepting support payments for capital expenditure.

VAT

Many of the farm support payments are outside of the scope of VAT. This means that businesses do not have to charge VAT on the receipt of the income. However, consideration should be given as to the impact that income might have on the recovery of input VAT.

If the income is used to support the activities of the business, and the business is making taxable supplies, it is possible for the input tax incurred to be linked to those taxable supplies (to allow input VAT recovery). In the case of farming, this would usually be linked to the sale of the produce.

There was a case to support this, being Colin Newell v HMRC 2021, whereby a business carried out various taxable supplies, including a biomass business generating hot air from burning wood chips. The business received a support payment under a ‘renewable heat incentive scheme’, which they used to pay for the general costs of the business. The recovery of input VAT on these costs was initially challenged, but it was concluded that there was a direct and immediate link between the purchases and taxable supplies, and the fact that the business qualified for subsidies should not detract from that.

Of course, every scenario will be different, depending on the nature of the expenses incurred, and the evidence available to support the link to taxable supplies.

It is also important to consider who the supplies are being made to and from. For example, the business can only recover the input VAT on expenditure if they are the entity being invoiced by the supplier.

Summary

These schemes provide valuable cashflow support to farmers and can generally be received without putting businesses in a tax disadvantage. However, each scheme and arrangement will be different, and Rickard Luckin can advise your business on the tax implications in further detail.