Tax breaks risk undermining new farm support policy
This post is by Miles King of People Need Nature.
The current tax system operates against the sort of public benefit that the new agricultural policy established by Michael Gove is seeking to create. English landowners receive £2.4 billion a year in tax breaks for which there is little or no benefit to society. This amount of money is almost exactly the same as landowners receive in farm subsidies and it exposes a contradiction: although the system of providing payments to farmers is being fundamentally reformed, the tax breaks received will be untouched.
England’s farmers and landowners currently receive £2.5 billion a year from the EU farm budget. Thanks to Brexit, a new agriculture policy is being developed, where landowners will only be paid to provide public benefits such as more wildlife, carbon storage, reducing urban flooding or sustaining rural communities. Unfortunately, the Agriculture Bill, which will place this new approach into law, is stuck in parliamentary limbo.
The system currently operates under a ‘polluter is paid’ principle
The main tax exemptions given are for red diesel, business rates and inheritance tax. The first two operate apply to every farm in the land. Duty on red diesel is a fifth of that on normal diesel. While only a quarter of it is used in agriculture, this particular tax break is worth around a billion pounds a year to farmers across the UK, and £550 million a year in England. It mostly applies to big arable farms. While the government wants to apply the ‘polluter pays’ principle to future farm support, ‘the polluter is paid’ principle operates for red diesel.
Farmland and farm buildings are entirely exempt from business rates, which is worth about £1 billion a year in lost rates to fund Local Authority budgets. As rates are based on land value, this exemption is worth most to the largest landowners. There are no conditions attached and the government does not assess how much it costs the Exchequer.
Other tax breaks available to farmers include VAT exemptions, exemption for road tax and MOTs on farm vehicles, and ‘roll-over’ relief from Capital Gains Tax. This relief applies when farmland is sold for development. As the land value increases perhaps a hundred-fold, that can lead to a large capital gains tax bill. Roll-over relief allows that profit to be reinvested in farmland, where no tax is payable.
Tax breaks push up the price of farmland and encourage wealthy investors to see land as a means of sheltering their wealth and generating a guaranteed income, rather than as something to care for. A whole mini-industry of tax advisers, accountants and legal professionals has built up around the opportunities to shelter wealth in farmland.
Some have suggested pesticides and fertiliser taxes as a way to reduce the environmental damage caused by intensive farming. A 25 per cent fertiliser tax could raise £250 million a year and might cause some farmers to reduce their use. But this sum is less than half the £550 million a year tax break on red diesel and compares with the £900 million farmers spent on pesticides in 2016-17.
Tax breaks favour the fortunate
Small farmers are certainly not benefiting from the tax system. Take Martin Gott, who produces St James sheep milk cheese from 20 acres of tenanted land in the Lake District. He thinks exemptions from inheritance tax and business rates should be abolished and replaced by a payment based on the average wage, to individual farmers. He believes this would be a far more effective way of supporting small farmers to produce food, care for the environment and keep rural communities alive.
“Why allow inheritance tax (exemption) on farms which are then let on a one year let?” he says, pointing out that farms with very short term tenancies, or managed by contract farming businesses, provide far less in the way of social or environmental benefits than small farms on long leases. Martin Gott also thinks that abolishing business rate exemption will “drive out rent-seeking” behaviour, by investors only interested in maximising the return on their investment (and sheltering their wealth), rather than contributing to the rural economy and communities.
Chris Jones, of Woodland Valley farm, in Cornwall, agrees that the tax system inflates land prices, making land too expensive for new entrants into farming. He would like to see tax breaks focused on public benefits such as storing carbon as a way of mitigating climate change. He is focused on farming as sustainably as possible and has doubled his soil organic matter: “if we were paid £100 a tonne of carbon stored, we would be laughing”.
Changes to the system will need to be carefully considered
Should these tax breaks simply be abolished and the £2.4 billion a year redirected towards public benefits like carbon sequestration? The change would need to be considered carefully to avoid damaging unintended consequences. And there may well be a good argument to provide an exemption for small family farms, perhaps for the first 200 acres. It is hard to think of a good reason why tax exemption on red diesel should be retained, but again there could be a small allowance to cover use on small-holdings and small family farms. Business rate exemption could be replaced with a system where the rateable value also reflected the public goods provided, so land committed long term to activity, such as wildlife conservation or other public goods, could be given partial or complete exemption.
Brexit does provide an opportunity to open up the tax maze to scrutiny and explore how it could be reformed. It could be used to reward those farmers who manage their land sympathetically for wildlife, adopt the principles of agro-ecology and produce the food we need to eat more of, like pulses, fruit and vegetables.
Miles King writes about nature and politics at www.anewnatureblog.com. People Need Nature has recently published its latest report, Where there’s muck there’s brass: revealing the billions hidden in farmland tax shelters, investigating the tax system and how it affects farmland.