Farming business - the use of barter arrangements

Inheritance tax, barter transactions and the importance on the Farm valuation and IHT400

Many farms operate through some interaction with “barter” which is an “exchange of goods and services”. Such practices can have a negative impact when claiming the inheritance tax reliefs of business property relief (BPR) and agricultural property relief (APR) where the activities undertaken by the deceased have to be explained.

The correct recording of barter transactions is important in farming operations. This should show, when needed, that there is the required level of trading activity to justify claims for inheritance tax relief. Such records will also be essential to establish exactly when the business started. No matter how small the operation, the taxpayer and the business adviser must be disciplined in business recognition.

The importance of the IHT400 declaration

The barter transactions will impact on both the valuation of the business and the completion of the IHT400. The farming partners should all be involved in the valuation of partnership property and information contained on the IHT400. If someone wants to exclude one of the farming partners from the facts surrounding the farming partnership, even if they are not a beneficiary of the Will, it is normally a worrying point. Many of the surviving farming partners are born on the farm and have important historical detail to include.

Farming partners might be aware of barter and offset and the accounts being submitted with the IHT400 (three years) should be adjusted or reconciled. The declaration by the executor on the IHT400 makes matters very clear:

“I/We understand that I/we may be liable to prosecution if I/we deliberately conceal any information that affects the liability to inheritance tax arising on the deceased’s death, or if I/we deliberately include information in this account which I/we know to be false.”

The executor has confidentiality issues around the IHT400 but must make full enquiries. The declaration confirms:

“To the best of my/our knowledge and belief, the information I/we have given and the statements I/we have made in this account and the schedules attached (together called ‘this account’) are correct and complete.”

“I/We have made the fullest enquiries that are reasonably practicable in the circumstances to find out the open market value of all the items shown in this account.”

Full understanding of the farming operation

It is therefore key that when the probate valuation is produced there is a full understanding of the farming operation, the services carried out by the farming partners and any barter. The executor is responsible for providing details to the valuer and this includes:

• Who is living in farmhouses on which agricultural property relief is being claimed
• Why there was haymaking on the fields but sales of hay were not found in the farm accounts due to barter arrangements
• What services the farming partners carry out and those which a sub-contractor actions and where the cost for the sub-contractor is shown. If the cost cannot be seen in the accounts an explanation must be given.

It could well be that a contractor makes the hay or silage in return for, say, 50% of the amount produced or indeed all the produce and they fertilise the field. Therefore the accounts showed no fertilising of the fields and very little farm produce. The offset must be shown in the accounts, valuation and IHT400.

Likewise, with a livery yard that is run on a farm it could be one of the “horse mad” liveries carries out all the services in return for their own livery plus keeps the extra monies. The accounts therefore show simple livery rents with all the services being conducted outside the farm. Obviously the farming partnership must ensure the income is declared. Such a structure is very inheritance tax inefficient as the full income should go into the farm accounts. If the valuation were to say something on the lines of “all partners provide services for the livery operation” this would be false and would not be reflected in the accounts.

This false declaration ignores the words:

“I may be liable to prosecution if I deliberately conceal”. It raises the question: what research the executor must undertake, the need for the farm accounts to show the correct and full position and the need for the executor and valuer to carry out basic checks and to ask all parties involved in the farming operation their understanding of the detail. To ignore the voice of a partner who is not a beneficiary is very high risk in the context of a farming partnership.

The correct recording of barter

To put such a practical situation in context, recent tax tribunal cases show that HMRC has been scrutinising claims to sideways income tax loss relief. Such intense HMRC review has included rural businesses such as a tree surgery and woodmanship business – Kevin Johnson [2016] (TC4805). The Johnson case involved no monetary income, but there was ‘barter’ income. The tribunal considered the impact of this on the taxpayer’s ability to offset tax losses sideways against other income. The case reminds taxpayers and advisers of the need to show the correct ‘barter’ or ‘non-monetary’ transactions in business accounts and to disclose these correctly on the tax return. The First-tier Tribunal clarified the understanding that the activity of bartering is no less capable of being defined as a trade than one involving money. However, the barter transactions musts be recorded correctly in accounts, tax returns and all submissions to HMRC.

The First-tier Tribunal was of the view that a business did not have to include monetary income to be defined as a trade. It was agreed that services could be provided in return for a benefit. However, the tribunal clarified that, just because a particular piece of work was capable of being a trading activity, this did not make it a trade. Simply because Mr Johnson owned a chainsaw and carried out occasional work for a neighbour in return for wood could not, on that basis alone, mean that he should be described as a trader. The tribunal decided that it was necessary to examine the badges of trade to consider the commerciality point further and consideration was given to Marson v Morton [1986] STC 463.

Conclusion

It is a practical reality that a farm can operate with barter arrangements across a multitude of areas, eg. with tree surgeons, farm contractors, livery services etc, especially as farmers become elderly; the equipment becomes more expensive and the tasks more onerous. However, this barter must be correctly recorded. The need to record barter is correct in income tax and VAT terms and might result in some extra payments by the farming partnership. However, such amounts could be very small compared to the £millions in inheritance tax through not being able to show the act of agriculture, the supply of services and the commercial use of woodland, all through “senseless barter” which the executor fails to uncover by not asking the right questions of those with the correct information.

Contributed by Julie Butler, Butler & Co