The Rise of Viticulture – The Tax Implications for Start-Ups

Sussex Business Times got into contact with Partner at Knill James Chartered Accountants, Suzanne Craig, who explains the implications that come along with starting up businesses in the UK’s wine industry

The desire to buy local produce, and the growing ‘slow food’ movement, have resulted in increased custom for many food and drink producers in the UK over the last few years. Changes in the UK’s climate, which has seen weather conditions rival that of France’s renowned wine regions, have helped the UK’s wine industry in particular.

This has been evidenced by an increase in vineyard start-ups here in the South East – HMRC has received 65 applications to start a vineyard in the last year, which is double the number from two years ago.

All individuals pursuing the dream of exercising their entrepreneurial muscles will face the same question, “which business structure should I adopt?” This question must be addressed at the very start of the business, as the ultimate decision may vary between vineyards for different reasons. However, many start-up vineyards are not always aware of the tax implications of different business structures.

A number of vineyard start-ups will have prepared a sound business plan for both grape and wine production, and therefore will have a good idea of how much expenditure is involved in establishing a vineyard – and the likely return on that capital. For example, it’s not uncommon to have to wait four years to generate a profit from a vineyard business. As a result, trading losses would be generated up until that date.

This trading loss can be used very wisely if the business structure has been set up as either a sole trader or a trading partnership, traditional, or trading as a Limited Liability Partnership (LLP). In this scenario, the loss arising in the first four tax years can be carried back against the general income of the three years prior to which the loss was made. This may be particularly attractive to those who paid higher rate income tax of 40% and above when employed, as the tax repayments can be a great help in the difficult first few years.

There is a restriction on the maximum amount of loss relief available being the greater of £50k and 25% of net income for the tax year concerned. However, it’s an attractive relief that may assist cash flow in those challenging years. A further restriction applies to LLPs, whereby the loss is limited to the capital contribution into the partnership by the individual partners.

Involving an accountant at the start of the business, when establishing the appropriate structure, will enable the business owner to undertake considered tax planning. However, the tax ‘tail’ should never be allowed to ‘wag’ the commercial dog and, consequently, there may be other reasons why a different business structure would be more appropriate for the vineyard.

Regardless of the business structure, certain reliefs maybe allowed through the application of the capital allowance system. Every UK business possesses an Annual Investment Allowance (AIA) of £200k which permits qualifying capital expenditure of up to that amount to be written off against profits or indeed create losses in the year of acquisition.

Vineyards are typically capital intensive with large initial outlays such as tractors, sprayers and, if a winery is involved, significant allowances may be claimed. In addition to the AIA, if expenditure is incurred on energy or water efficient plant and machinery, these will also qualify for 100% allowances beyond the AIA.

It is relatively easy to identify items of ‘loose’ plant and machinery but there is another layer of complexity for assets which are embedded within a business property, such as a winery. High specification buildings such as wineries may comprise up to 35% or 40% of eligible plant. Every commercial property is likely to contain such assets which include electrical systems, plumbing, air conditioning systems and the like, but the specialist nature of wineries can often mean that the savings to be made for a claim can be substantial. Recent changes to legislation have meant that the scope for claims on expenditure of second hand capital assets are restricted, but new builds are not so affected.

It is very important that any new start up assesses at an early stage the level of eligible expenditure, as this may provide material cash flow advantages in the early years of the business.

Although not available to unincorporated businesses, another valuable state-backed relief can be obtained through the making of research and development (R&D) tax credit claims. The government is currently extremely keen for UK businesses to demonstrate innovation in a competitive global market. Small and medium enterprises (SME’s) can obtain an enhanced deduction on relevant R&D spend, equating to 130%. Thus, on a £100k R&D project this will provide £230k tax relief. In the event of a loss-making situation, losses can be surrendered in exchange for a 14.5% tax credit refund on the loss attributable to the R&D expenditure.

In addition to discussing business structure with a business advisor, it is also essential to involve tax specialists who will be able to ensure that the business takes advantage of the reliefs which are available to this growing industry.