BIM55128 - Farming: Basic Payment Scheme (BP): Tax Treatment/Basic Charge

The Basic Charge (Income Tax Issues)

S5, S9, S25 and S687 Income Tax (Trading and Other Income) Act 2005, S996 Income Tax Act 2007,
S35, S36, S46 and S979 Corporation Tax Act 2009, S1125 Corporation Tax Act 2010

All BP receipts are chargeable to income tax (subject to the usual exemptions, for example, for charities). The basis of charge will depend on the circumstances under which they are received. It is worth being aware of these, as the differences in treatment can be significant.

As BPS PE (BPS payment entitlements) are essential to claim BP and then open the door to the Greening and Young Farmer payments, these are seen as effectively one income stream.

Traditional Farmer

The most straightforward situation is that of ordinary commercial farmers who continue to farm as they have for many years in that they grow and harvest crops and/or rear farm animals. Such a person continues to satisfy the statutory definition of farming for tax purposes and receives the subsidy for farming in accordance with the BPS rules. As a consequence sums receivable are chargeable as revenue trade receipts for income tax purposes.

BP without Production

Under the BPS it is possible to receive an income without production if certain conditions are met. Where there is no actual production then there can be no occupation for the purposes of husbandry and therefore no farming trade. Whether the farmer has actually ceased to farm for tax purposes will be a question of fact. One must look at the intention together with the evidence supporting the stated intention. There are several main possibilities.

First, where only part of the holding is no longer used for production then the farm as a whole will likely continue to be worked and the farming trade continue. Similarly, where there is no production on the whole of the farm but this is a temporary measure, for example while changes are being made, then HMRC will accept that the farming trade continues. However, if a return or claim is made that production has ceased only temporarily, then HMRC would expect to see the farm infrastructure maintained.

Second, where there is a permanent cessation of all production then the trade will also have ceased. If there is no trade then the BP will be chargeable as miscellaneous income under Chapter 8 of Part 5 of Income Tax Trading and Other Income Act 2005 (ITTOIA).

Third, there may be a new trade in place of farming. If there is no farming trade for tax purposes but it can be shown that the land occupied is still managed on a commercial basis and with a view to the realisation of profits then that occupation will still constitute a trade under section 10 ITTOIA 2005. This is a different trade from farming. So, for example, if unused losses existed at the change then they would not be available to relieve against profits arising in the new trade. The onus will very much be on the land occupier to show that these conditions are satisfied and that trading status is consequently justified. However, where the person so asserting was previously a profitable commercial farmer then while the potential profitability of the activity will still need to be established, HMRC will make the presumption (rebuttable) that the farm will continue to be organised and run on a commercial basis.

Non Farmers

The simple receipt of BP is not evidence that a person is carrying on a trade of farming for tax purposes. The difference between the way entitlement to BP is defined and the way farming is defined for tax purposes needs to be appreciated. For example, land that is used for grazing horses or ponies kept for the leisure purposes of the BP recipient is eligible for the BP provided all the other conditions are satisfied. But that does not mean a trade is being carried on. In these cases the charge to tax will arise under the miscellaneous income provisions.

In summary, BP may be taxable under:

           ·         section 9 ITTOIA 2005 (farming),

           ·         section 10 ITTOIA 2005 (non-farming trade), or

           ·         Chapter 8 of Part 5 of ITTOIA 2005 as miscellaneous income.