The rise of viticulture – the tax implications for start-ups

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In her latest UK200Group blog post, Suzanne Craig, Partner at Knill James Chartered Accountants, looks at business structures which could benefit start ups in the growing UK 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.

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