Taxation of BPS Lump Sum Exit Scheme payments clarified by HMRC

27 Jul 2022

farm gate

“Clarification on how payments under the Lump Sum Exit Scheme (LSES) are to be taxed is welcome news,” says Martyn Dobinson, partner, and a member of the firm’s Land and Rural Practice Group.

“Last year’s consultation on the scheme had raised numerous questions about the LSES, not least that of the tax treatment of payments received under it, and that has now been clarified,” he says.

The LSES provides a lump sum payment for eligible farmers seeking to retire from farming, replacing the payments that would otherwise have been due to them under the Basic Payment Scheme (BPS), through to 2027. Sole traders, partnerships, and companies may all qualify for payments under the LSES.

The policy paper and draft legislation, published by HM Revenue & Customs (HMRC) on 20 July, state that such payments will be treated as capital receipts and chargeable to capital gains tax (CGT), rather than income tax, and for companies as chargeable gains subject to corporation tax. The measure is effective from 6 April 2022.

Martyn adds:

“This means that payments under the LSES will not be charged as receipts of a trade, but rather as proceeds from the disposal of a chargeable asset, or for a company, from an intangible asset. This is similar to the treatment of BPS entitlement disposals.

“This helpfully clears the air over this issue and provides clarity for our clients who are looking to take advantage of the scheme.”

In cases where the eligibility criteria are not met, LSES payments will, however, continue to be taxed as receipts of a trade or miscellaneous income.

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