Taxation of Lump Sum Exit Scheme payments
Published 20 July 2022
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Who is likely to be affected
This measure will affect sole trader farmers and farming partnerships and companies who have received, or will receive, payments under the Lump Sum Exit Scheme (LSES).
General description of the measure
This measure clarifies that payments under the Lump Sum Exit Scheme are treated as capital receipts, and are therefore charged to Capital Gains Tax or, for companies, to Corporation Tax as chargeable gains.
Policy objective
This measure aims to set clear and fair rules regarding the taxation of Lump Sum Exit Scheme payments to improve the uptake of the scheme by retiring farmers.
Eligible farmers who apply for LSES receive a lump sum payment which replaces all the payments that would be due to them under the Basic Payment Scheme (BPS) until 2027. Treating these payments as capital receipts will enable eligible farmers to benefit from reliefs currently available when disposing of Basic Payment Scheme entitlements.
Background to the measure
The government consulted on the Lump Sum Exit Scheme from May to August 2021. Several responses to the consultation requested clarity on how the payments would be treated for tax purposes, and saw this as important for overall uptake of the scheme. In its response to the consultation in February 2022, the government announced that it intended to introduce legislation to provide clarity that LSES payments would be treated as capital in nature.
Detailed proposal
Operative date
This measure will be effective from 6 April 2022.
Current law
Payments received under the Basic Payment Scheme are generally taxable as receipts of a trade under Part 2 Chapter 2 Income Tax (Trading and Other Income) Act 2005 (ITTOIA) or Part 3 Chapter 2 Corporation Tax Act 2009 (CTA09), or in some circumstances as miscellaneous income under Part 5 Chapter 8 ITTOIA or Part 10 Chapter 8 CTA09.
Proposed revisions
Legislation will be included in Finance Bill 2022-23 to provide that payments received under the Lump Sum Exit Scheme which relate to an eligible claim are neither receipts of a trade nor miscellaneous income.
This will allow the payments to be treated as the proceeds from the disposal of a chargeable asset, as is currently the case when Basic Payment Scheme entitlements are disposed of.
In the case of a company receiving Lump Sum Exit Scheme payments, the payments will be treated as the proceeds from the disposal of an intangible asset.
Payments where the eligibility criteria are not met will continue to be treated as receipts of a trade or as miscellaneous income.
Summary of impacts
Exchequer impact (£million)
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| Empty | Empty | Empty | Empty | Empty | Empty |
The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at the next fiscal event.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure is expected to have an impact on approximately 1,000 to 3,000 individuals by subjecting the payments they receive under the Lump Sum Exit Scheme to Capital Gains Tax instead of Income Tax. These individuals will now need to report their payments as the proceeds from the disposal of a capital asset instead of as income.
This measure is not expected to impact on family formation, stability or breakdown as it is optional for individuals to subscribe to the Lump Sum Exit Scheme and the legislative outcome will be to tax LSES in a similar way to Basic Payment Scheme. Customer experience is expected to remain broadly the same as this measure does not significantly alter how individuals interact with HMRC.
Equalities impacts
By making sure payments received under the Lump Sum Exit Scheme will be treated as capital, it will provide clarity to the current generation of farmers when considering whether to exit the profession. It is anticipated that this will benefit older farmers as they are more likely leave the profession.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on approximately 50 to 200 businesses by changing the way in which they report the payments they receive under the LSES, compared to how they are reported under the Basic Payment Scheme. One-off costs will include familiarisation with the change and could also include upskilling staff of the change. Continuing costs could include further Income Tax Self Assessment or Corporation Tax Self Assessment returns.
Customer experience is expected to remain broadly the same as this measure does not significantly alter how individuals interact with HMRC.
This measure is not expected to impact civil society organisations.
Operational impact (£million) (HMRC or other)
Our analysis is currently confirming there are no financial consequences for HMRC for the publication of draft legislation.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from Department for Environment, Food and Rural Affairs and tax returns, and kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, contact the Business Profits Team by email: [email protected].