UK | Farmland Tax Breaks Revealed

By Miles King

A recent book published by Guy Shrubsole “Who Owns England?” as well as a report delivered to the UK Labour Party have thrust the inequality of UK land ownership into the public eye. Shrubsole’s book revealed that 50% of England is owned by 25,000 landowners. Lesser known is that these landowners (and farmers) profit further from a series of, sometimes bizarre, tax breaks. NGO People Need Nature, investigated this tax system and its implications. Miles King, who wrote the report, summarises it below. 

The charity I work for, People Need Nature, has published its latest report, investigating the tax system and how it affects farmland. â€śWhere there’s muck there’s brass: revealing the billions hidden in farmland tax shelters” lays out the many, varied, and some frankly bizarre tax breaks available to farmers and landowners. And we argue that these are providing no benefit to society, and in some cases are operating against things society might want.

Farmers and landowners across the UK receive between £3 and £4 billion a year in subsidies from the EU’s Common Agricultural Policy. This equates to about £2.5 billion a year in England. Most of that is paid in the form of an area-based payment, while a small proportion pays for agri-environment schemes supporting farming practices, which are more amenable to things like farmland wildlife. Anyone interested in England should be interested in what happens on farmland, because farmland covers about three quarters of England. So most of the money, which is paid to farmers, is paid because they own or manage the land, and there are really very few strings attached to that money. That’s not the farmers fault of course, it’s the way the EU and the UK Government decide to disburse those funds.

As a result of the EU referendum back in 2016, the UK will have to come up with a new way of supporting farmers, as we will leave the Common Agricultural Policy. It’s likely that there will be different approaches in each of the UK countries, and I’m really only talking about England from now on. Michael Gove, when he took over Defra, immediately starting talking up the opportunity to create a new way of supporting farmers, to provide what are known technically as public goods. This is not particularly helpful language, but it’s economics-ese for things that society benefits from, which cannot be provided by the market. These might include more farmland wildlife, better water quality in our rivers, reduced downstream flooding in our towns, more pollinators for our crops – and even somewhat elusive things like “rural vitality”, which is some complex measure of the health of rural communities.

There are still many problems with the Agriculture Bill, but the central premise of “public money for public goods” still stands.

The Agriculture Bill, which is now stuck somewhere in Parliament, has taken this thinking forward, and it looks like there is still a good chance that at the end of all this farmers will only be paid for public goods, and the old system of receiving a subsidy for owning the land, will be gone. There are still many problems with the Agriculture Bill, but the central premise of “public money for public goods” still stands. But what about the tax system? Is it working to support provision of public goods, or not. And if not, should it also be reformed? This was something that had been bothering me (and others who know far more about this than me) for a while.

When Chris Packham asked me to be his Minister of Agriculture and write a chapter in last year’s People’s Manifesto for Wildlife, I thought this would be a good opportunity to raise the issue of farmland and tax, which I duly did. I was surprised that this was picked out for particular criticism, so I thought I had better get on and find out what the situation actually is.

What I found was surprising – that the total tax breaks available on farmland in England are as great as the total subsidy paid under the Common Agricultural Policy. And there are even fewer conditions placed on those tax breaks than on the subsidies, conditions that could mean the tax regime provides benefits to society. The main tax breaks are Red Diesel, Business Rates exemption and Inheritance Tax exemption.

The report on Farmland Tax Breaks in the UK was published by People Need Nature 28th June 2019.

The first two operate day in day out on every farm in the land, though of course the more Diesel you use, the bigger the tax break you benefit from. So this particular tax break, worth around a billion pounds a year across the UK, and ÂŁ550M a year in England, will mostly go into the pockets of big arable farms, where most of the diesel is used.

I was surprised by how much Red Diesel is used on arable farms – one 220ha potato farm in Essex gets through 200,000 litres of diesel in every growing season. That works out at 909 litres of diesel per hectare. Although this particular farm grows potatoes one year in six on a rotation, the red diesel used growing those potatoes (roughly speaking) adds around 10g per packet of CO2 to their carbon footprint.

Farmland and farm buildings are entirely exempt from Business Rates. This is worth about ÂŁ1Bn a year in lost rates – rates that increasingly flow directly to cash-strapped Local Authorities. Again, as rates are based on the value of the land, the larger the area of land owned, the bigger the saving. So this exemption is worth most to the largest landowners. There are no conditions attached to this exemption. Indeed this exemption is so deeply buried that the Government don’t even make an assessment of how much it costs the Exchequer. 

Together these tax breaks have created the ideal conditions for investors looking for a place to shelter their wealth from taxation.

The third doesn’t really show up in the annual accounts of farms, because 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 and it varies considerably from year to year, but APR and the related Business Property Relief are likely to cost the exchequer around £700 to £800M a year.

There are then a whole plethora of other tax breaks available to farmers – from VAT exemptions, exemption for road tax and MOTs on farm vehicles, to “roll-over” relief from Capital Gains Tax. If some farmland is sold for development, when land suddenly becomes worth perhaps a hundred times as much as it was, that can lead to a hefty capital gain tax bill. Roll-over relief allows that profit to be re-invested in farmland and no tax is payable. That pushes up the price of farmland for everyone else and encourages wealthy investors in, who may well see the land is nothing but a means of sheltering their wealth and generating a guaranteed income.

Guy Shrubsole’s recent book “Who Owns England” revealed, 50% of England is owned by 25,000 landowners, who are the beneficiaries of this very generous tax regime.

Together these tax breaks create a rich and complex landscape, which has led to the creation of a mini-industry of tax accountants, land agents and consultants. Worse still it, has created the ideal conditions for investors looking for a place to shelter their wealth from taxation, quite legally, without having to move to the Caribbean. Even without considering the effect of the farmland tax regime attracting in those seeking tax shelters, it’s salient to note that, as Guy Shrubsole’s recent book “Who Owns England” revealed, 50% of England is owned by 25,000 landowners, who are the beneficiaries of this very generous tax regime.

Guy has found from Land Registry data, that between 2004 and 2015, 280,000 acres of land was purchased by offshore entities. I worked out that, just for this land ÂŁ50M a year in farm subsidies and tax breaks is flowing offshore, to who knows where. The total farmland owned offshore is likely to be far higher though.

It’s also worth considering how these tax breaks fit in with proposals for things like pesticide or fertiliser tax. There would be little point in introducing such things, without looking at the existing tax regime. a 25% fertiliser tax would raise £250M a year, which sounds like a lot and may help to reeduce fertiliser use. But when compared with the £550M a year tax break on red diesel, it’s not so big, and any climate benefits from a fertiliser tax would be counteracted by the red diesel subsidy.

Likewise with pesticides – UK farmers spent £900M on pesticides in 2016/17 – although this research suggests they have collectively overpaid by £200M – equivalent to £44/ha. And this illustrates quite well where these tax breaks are flowing. They are not, to any great extent, flowing to the small struggling family farm. They are benefitting the big landowners and large arable farmers. But they are also being priced in, by the agricultural suppliers (of chemicals, machinery) and by the retail buyers. I suspect that a fair chunk of that £2.4Bn a year is going to the likes of Bayer and Tesco.

None of this provides the sort of public benefit that the new Agricultural Policy Michael Gove has established, 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.

This was first published on Miles King’s blog here.