The UK agriculture sector is under immense financial pressure, with rising costs, falling prices and labour shortages squeezing the cashflow of farmers still reeling from the seismic shock of the government’s raid on inheritance tax.
Labour costs have been exacerbated by post-Brexit immigration rules and the war in Ukraine, while policy shifts around subsidies and incentive schemes have left many farmers unsure about how to optimise their income.
Input costs have also risen by an average of 44% since 2019, driven by a substantial increase in expenses for animal feed, energy and fertilisers, according to research by the Agriculture and Horticulture Development Board.
‘Firms will do a pence-per-litre schedule to review the cost of milk production’
Squeezed margins
‘The price of fertiliser and general wage costs have put pressure on farmers, particularly in the previous financial year as milk prices, for example, have come down,’ says Sam Kirkham, partner at Albert Goodman. ‘Margins have been really squeezed.’
Against this backdrop, there is an increasing need for detailed budgeting and forecasting to help farmers anticipate cash shortages and manage their working capital, explains says Azets partner Duncan Swift, who advises food and agriculture businesses across the UK and Europe.
‘The typical farmer’s response to deal with rising input costs and a price squeeze is to raise productivity. The other is to seek better data on their performance,’ he says. ‘The critical thing is to have visibility of gross margin by key product and key customer.’
‘They are in a difficult position of not being able to really control the price they get’
This includes benchmarking against the best in class and identifying KPIs. For example, Kirkham says that for its dairy clients the firm will do a pence-per-litre schedule to review how much it costs to produce a litre of milk and the cost per litre of the machinery and labour, which have risen since the Covid-19 pandemic.
‘We can say whether they are doing well or not against the benchmark and, if not, point them in the direction of a consultant to look at how they can improve,’ Kirkham says.
Forward thinking
Practitioners are also getting their agricultural business clients to adopt financial forecasting tools to get better visibility over their finances, according to Janet Collins, a director at LHP Accountants.
‘The biggest thing we have done is put them on to software, given them apps that will take pictures and save time. That helps us help them with their cashflows,’ she says. ‘If they are reasonably up to date, we can prepare accounts quite quickly, and cashflows and business plans.’
Accountants are advising clients to review their input costs, renegotiate supplier contracts where possible, and explore options for group purchasing to benefit from economies of scale.
‘Ill-thought-through plans will force hardworking families to change business structures’
But the options are quite limited. Unlike other businesses, farmers are unable to just put their prices up, as they are often dictated to by the large supermarkets and have had to contend with lower prices for key produce such as wheat and milk.
‘They are in a difficult position of not being able to really control the price they get, so it is really about trying to drive output and minimise costs,’ Kirkham says.
But the tightening of belts has had a knock-on effect on other industries as farmers have pulled back from capital expenditure and put investment decisions on hold. For instance, in the first nine months of 2024, UK agricultural tractor registrations were 15% lower than in the same period in 2023.
‘Agricultural machinery dealers are really suffering because farmers don’t have the cash to invest and update their machinery or to invest in the farm or infrastructure,’ says Kirkham.
Tax hit
The stress of managing tightening cashflow has been compounded by the government’s decision to effectively introduce a 20% tax charge on businesses and agricultural property values of more than £1m.
Chancellor Rachel Reeves announced in the autumn budget that the government would impose inheritance tax on family farms, with a full 100% relief being limited to the first £1m of agricultural and business property. Assets exceeding this threshold will be subject to a 20% charge, which is half the standard rate.
Kirkham, who is also a spokesperson for the Rural Accountancy Group (RAG) – which comprises 10 accountancy firms representing around 10,000 farming and agricultural businesses across England and Scotland – said accountants are currently ‘calculating the impact of these rules for our clients’.
‘Some clients realise they need to put time and effort into understanding where their assets are’
The RAG published a report in January urging the government to rethink the ‘ill-thought-through’ plans that Kirkham said, ‘will force hardworking families to change the structures of their businesses to minimise its impact’.
As has been widely covered in the press since the government announcement, for often asset-rich but cash-poor farmers, the change raises challenges about how to meet potential inheritance tax liabilities without liquidating parts of their holdings.
Joe Spencer, partner at MHA, says there has been a spike in demand from clients for advice around restructuring their estates to ensure tax efficiency possibly through lifetime gifts and trusts, or reorganisation of business structures.
‘We have lots of clients concerned about the overnight changes to what was before quite a tried-and-tested way of passing assets on to the next generation,’ he says.
‘A lot of farmers make money from subsidy plays – switching into subsidy income streams’
The accurate valuation of agricultural and business assets is crucial to determine tax liabilities and explore potential reliefs or exemptions, he adds.
‘Some clients are very well organised and know what value sits where, whether in the farm or in the individuals’ hands. But it has made others realise they need to put some time and effort into understanding where their assets are,’ says Spencer.
Subsidies overhaul
The replacement of the European Union’s Common Agricultural Policy subsidies by the UK’s Environmental Land Management schemes after Brexit has also added to the uncertainty caused by the IHT change.
The Basic Payment Scheme (BPS) – which acted as a safety net to supplement farmers’ income – was phased out in England in 2024, to be replaced by ‘delinked payments’, which are not directly tied to land ownership.
Under the BPS, farmers were paid based on the amount of land they managed, with few environmental requirements, and payments were largely automatic for landowners and farmers meeting basic criteria.
‘What is available to the farm depends on its characteristics and location’
Now farming businesses can apply for the Sustainable Farming Incentive (SFI), which is designed to encourage the adoption environmentally friendly practices while maintaining food production.
‘A lot of farmers also make money from subsidy plays – switching into subsidy income streams such as environmental schemes – relying on their accountants to identify which scheme is most beneficial,’ Swift says.
‘What is available to the farm depends on its characteristics and location, as well as the age and background of the farmer,’ he adds.
But unlike the BPS, payments are linked to specific sustainable land management actions – such as improving soil health, enhancing biodiversity and reducing carbon emissions – and farmers must actively apply for SFI agreements.
‘The people who appear to have made the best use of the scheme have gone through it in detail and picked elements that aren’t deviating too much from what they are doing and won’t cost them too much to implement,’ Spencer says. ‘There is definitely a case of having to do more to get payment.’
More information
See ACCA guidance on agricultural property relief and business property relief, and on IHT and pensions. See also the AB article ‘IHT change reveals deeper flaws’.
