The words “tax haven” tend to conjure up images of palm-fringed Caribbean beaches and whitewashed buildings covered in the brass plates of shell companies. What might surprise many is that there is a tax haven sitting under everyone’s noses, here in England. It’s all perfectly legal and above board too. That tax haven is farmland.
A report from People Need Nature reveals how the tax system affects farmland. “Where there’s muck there’s brass: revealing the billions hidden in farmland tax shelters” lays out the many, varied, and sometimes bizarre tax breaks available to farmers and landowners. The report reveals that £2.4bn a year of tax breaks flow to English landowners who in return often provide little or no benefit to society. This is almost the same amount as they receive in EU farm subsidies (£2.5bn a year in England). And whilst the latter has been long-critiqued and is being reformed, the tax breaks are left untouched.
Three quarters of England’s land is farmland. Currently, much farm subsidy money is still paid just for owning the land. A new Agriculture Bill aims to fill the post-Brexit landscape and pay landowners instead for providing public benefits such as more wildlife, carbon storage, reducing urban flooding or sustaining very rural communities. But the Bill is currently stuck in Parliamentary limbo.
However, turning to domestic tax breaks/subsidies, the picture is less examined, but just a as troubling. As the People Need Nature report explains, the main tax breaks for farmland are Red Diesel, Business Rates exemption and Inheritance Tax exemption.
The first two operate day in day out on every farm in the land. Duty on Red Diesel is one fifth of that on normal diesel. While only a quarter of Red Diesel is used in agriculture, this particular tax break is worth around a billion pounds a year to farmers across the UK, and £550m a year in England. The tax break goes mostly to big arable farms, where most of the diesel is used. While the Government wants to apply the “polluter pays” principle to farm support, “the polluter is paid” principle operates for Red Diesel.
Farmland and farm buildings are entirely exempt from business rates. This is worth about £1bn a year in lost local taxation that would otherwise fund Local Authority budgets. As these rates are based on land value, this exemption is worth most to the largest landowners. There are no conditions attached to this exemption. This exemption is so deeply buried that the Government does not even make an assessment of how much it costs the Exchequer.
Inheritance Tax exemption (Agricultural Property Relief or APR) on farmland only applies on the death of the owner. Tax Justice UK recently published a report showing that 62% of APR in a recent year benefited just 261 families in England. It’s difficult to put a precise figure on the tax benefit, but APR and the related Business Property Relief are likely to cost the exchequer £700 to £800m a year.
There is a plethora of other tax breaks available to farmers, including VAT exemptions, exemption for Road Tax and MOTs on farm vehicles, “roll-over” relief from Capital Gains Tax. Roll-over relief applies when farmland is sold for development. As the land value increases perhaps a hundred-fold, that can lead to a large capital gain tax bill. Roll-over relief allows that profit to be re-invested in farmland, when no tax is payable.
This maze of tax breaks has led to the creation of a mini-industry of tax accountants, land agents and consultants. And more importantly it pushes up the price of farmland for everyone else and attracts wealthy investors, both at home and abroad, who may well see the land as a means of sheltering their wealth and generating a guaranteed income, rather than as something to care for. As Guy Shrubsole’s recent book “Who Owns England” revealed, 25,000 owners own 50% of England, who benefit greatly from this very generous tax regime. And Land Registry data reveals that 280,000 acres of farmland was purchased by offshore entities between 2004-2015. For this land alone, an estimated £50m a year in farm subsidies and tax breaks is flowing offshore.
Some have suggested pesticides and fertiliser taxes, as a way to reduce the environmental damage caused by intensive farming. A 25% fertiliser tax would raise £250m a year and may cause some farmers to reduce their use. But it’s small compared with the £550m a year tax break on red diesel. UK farmers spent £900m on pesticides in 2016/17 – equivalent to £44/ha.
This gives another clue as to where these tax breaks are flowing. They are not, to any great extent, flowing to the small struggling family farm, but benefit the big landowners and large arable farmers, the machinery and chemical suppliers and the retailers.
Small farmers are certainly not getting much benefit from the tax system. Martin Gott produces St James, a sheep-milk cheese from 20 acres of tenanted land in the Lake District. He thinks Inheritance Tax exemption for agricultural land and business rates exemptions should be abolished altogether, and be 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 – communities that are, in places like the Lake District, increasingly under threat.
“Why allow inheritance tax (exemption) on farms which are then let on a one year let?” says Gott, pointing out that farms with very short term lets, or just managed by contract farming businesses, provide far less in the way of social or environmental benefits than small farms on long lets. 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 operates to inflate land prices, making land too expensive for new entrants into farming. He would like to see tax breaks focussed on public benefits like storing carbon, as a way of mitigating climate chaos. Jones is intensely focussed 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,” say Jones, who also believes that we should “tax the crap out of (greenhouse gas) emissions.” Jones also believes Inheritance Tax exemption on farmland should be curtailed, though argues that small family farms should be exempt to allow them to be passed onto future generations.
The tax system as it currently exists operates against the sort of public benefit that the new agricultural policy Michael Gove is seeking to create. While Brexit might be a nightmare for all sorts of other reasons, this is a great opportunity to open up the tax maze to scrutiny and explore how it could be reformed. Reforms that could mean this substantial amount of money is channelled towards farmers who manage their land sympathetically for wildlife, adopt the principles of agro-ecology, and produce the food we desperately need more of in our diet, like pulses, fruit and vegetables.
Teaser photo credit: By Brian Forbes – originally posted to Flickr as Gairneybridge Harvest., CC BY 2.0
