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bigduckontax
bigduckontax, Accountant
Category: Tax
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We have a woodland that is requiring harvesting and we are

Customer Question

We have a woodland that is requiring harvesting and we are advised by the Forestry Consultant that we should Opt to Tax in order to not lose the 20% VATwhen it comes to the wood being sold on once harvested We are not registered for VAT and the area of the woodland is approx 23 acres
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.

Hello, I'm Keith and happy to help you with your question.

 

I concur with HMRC! I don't understand what your Forestry Consultant is on about either, though I can make an informed guess.

 

A wide range of tax incentives and grants are in place to encourage private ownership of woodlands in the UK.

 

Tax Incentives

 

Professional forest management, combined with careful tax planning, can lead to reliable and competitive returns from what can be a highly tax-efficient investment. You are affected by both Income Tax (IT), Capital Gains Tax (CGT), and Inheritance Tax (IHT). IHT only kicks in if you die and its appearance removes CGT from the tax equation.

 

IT

 

The income and profits from timber sales in woodlands managed commercially are free from IT.

 

CGT

 

The gain in value of standing timber, whether from the physical growth of the trees or rises in timber prices, is entirely free from tax. The sale price or transfer value of the trees is also left out of Capital Gains Tax calculations. Only the increase in the value of land is assessed for CGT in the event of an ultimate disposal.

 

VAT

 

Here the rules change. If the sale of your timber is going to raise over 81K annually or in any one year then you must register for VAT and charge VAT output tax on the invoice for your timber sale price. Then if you are registered any VAT input tax paid for goods and services, eg external management, tree felling contracts and the like can be reclaimed in the quarterly VAT return and if input tax exceeds the output tax HMRC will pay you the difference. If, of course, it's the other way around then you pay the tax man!

 

I do hope I have spread some light for you through the glades of woodland taxation.

Customer: replied 3 years ago.

Thank you for the note and whilst we were aware of all this - there is also a major disadvantage in non recovery of the VAT on costs of harvesting which makes the sale of the wood uneconomical.


 


Can we form a SPV and register the woodlands as part of the SPV services or can we just contract out to a VAT registered property related party who can undertake the whole process on our behalf.

Expert:  bigduckontax replied 3 years ago.
If your turnover does not exceed 81K then there is no requirement to register for VAT at all. I do however take your point regarding the whole exercise being uneconomic. I must say that thought had crossed my mind also.

You could contract out the whole process for a fee below the VAT registration level to a third party to escape the whole problem. That would be the easiest way out. I feel, however, that HMRC might look askance on this as a method of tax evasion. On the other hand they are going to get their take from the contractor's activities anyway for exactly the same services and might not, in fact, be concerned at all.
Customer: replied 3 years ago.

Many thanks I think this is about as far as we can go at this stage


 


Picking up on the point ref contracting out the monies will not come near us for the sale of the wood which is going to be about the same as the cost of harvesting so nil profit in it for us either way.


 


Where I see the advantage is they are Forestry guys and so by us agreeing a deal to let them harvest the wood and remove off the land at their cost is as far as we are concerned.


 


The urgency is that there is widespread Larch disease in the area and so why we are rushing into getting the harvesting done whilst there is true value for in the case that the disease arrives on these woods then the Forestry Commission will serve notice to force to harvest all the timber which is then contaminated by virtue of the Notice so the value plummets


 


I hope the HMRC will also see this is not in any way evading tax it is handing the responsibility over to a recognised Forestry company whose business is harvesting and selling woodland and we are still left in a minus position as we still need to deal with Fees of the Consultant and to re-plant but it takes away the responsibility of the forestry management


 


Thanks for your advice

Expert:  bigduckontax replied 3 years ago.
If the registering for VAT and the subsequent charges are going to be tax neutral, which as you recall I suspected, then there is little point in going down this road. It is the taxation equivalent of the proverbial lemon. However, if you sell out your commercial operations at below 81K there would be no VAT implications anyway and your business account would escape scot free. On reflection, I don't actually see any problem with this as the selling price will be well below the VAT threshold level.

Personally I have always wondered after Dutch elm disease and now Larch also why anyone would invest in timber at all! Round my area there are acres of woodland advertised for sale and seem to be no takers, but these are estates of Scots pine.

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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.