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HMRC internal manual

Business Income Manual

Farming in tax law: Short Rotation Coppice

S996 Income Tax Act 2007, S1125 Corporation Tax Act 2010

Short rotation coppice consists of densely planted, high-yielding varieties of either willow or poplar, harvested on a 2 - 5 years cycle, although commonly every 3 years. The roots (or stools) are not disturbed and send up shoots, which are cut down to ground level and used for fuel.

The statutory definitions of farming provide that the cultivation of short rotation coppice shall be treated as husbandry and thus farming and not woodland for Income Tax and Corporation Tax purposes. Accordingly, the land occupied for such cultivation shall also be regarded as agricultural land for Inheritance Tax purposes. ‘Short rotation coppice’ is statutorily defined as ‘a perennial crop of tree species planted at high density, the stems of which are harvested above ground level at intervals of less than ten years’. This must be distinguished from the growing of commercial woodland which is exempt from tax.

We regard the initial cultivation of the land including any spraying, ploughing, fencing, and planting of the cuttings as capital costs. Any Woodland Grants received by the landowner should be matched with these capital costs.

Capital Gains Tax

The costs of planting the cuttings referred to in the previous paragraph represent expenditure on the land, as the stools form part of the land. They will be allowable (net of any grant offset against them) in computing chargeable gains if the land is disposed of, provided they are reflected in the state of the land at the time of disposal. The cost will not be allowable if the stools are grubbed up before the land is sold. If the capital costs are not incurred by the person in receipt of the Woodland Grant then this grant may give rise to a liability to capital gains tax.

The cost may be used to roll over gains from disposals of other business assets under HMRC ESC/D22 `Relief for the replacement of business assets: expenditure on improvements to existing assets`.

Costs following the planting of the cuttings

These costs are of two types:

  • direct costs such as weeding, disease prevention, harvesting and the costs of the first cut (including labour and machinery costs), and
  • indirect costs such as rent, maintenance of farm buildings and general management costs.

All these costs are revenue expenses and are allowable in full. Direct costs are allowed by matching them against subsequent receipts from the sale of the crop and up to that time we would expect to see them fully reflected in the annual valuation of the coppice as a crop or carried forward in some other way. If the coppice is cut in the first year to establish the stools any income from sale of the cut material should be offset against these expenses thus reducing the amount to be carried forward and allowed against the income from the first harvest. Indirect costs may be treated in the same way as direct costs. We regard this as preferable but in most cases deducting them in the general farming account rather than carrying them forward is acceptable.

For subsequent cycles, the expenses of maintaining the crop should similarly be reflected in the valuation and matched against the receipts from the harvest. The anticipated biological life of the stools is around 30 years so approximately ten cycles may be expected.

Costs at the end of the life of the stool

Once the cycle of harvesting the coppice is over, the stools will normally be removed and, if necessary, drainage restored on the land. The costs incurred for the removal of the stools and their roots will be regarded as a capital expense. In view of the expected life of the stools these costs will be a long way off and a warning note must be sounded as law and practice may change. We regard the issues raised by short rotation coppice to be similar in principle to those relating to fruit orchards. At present a renewals allowance is available if orchards are replanted and HMRC would not seek to impose different treatment on the replacement of coppices. The costs of restoring drainage are allowed as a revenue cost following HMRC SP5/81 ’Expenditure on Farm Drainage’.