2017-07-10  

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Wine Growing? Why Not?

This week’s announcement that the English wine industry has enjoyed another record year with production jumping by almost one fifth and producer turnover increasing by 16 per cent over last year to £132 million, is all good news.

These encouraging numbers follow the decision of French champagne house Taittinger to plant its first vines on British soil, and the trade body, English Wine Producers, reporting in April this year that there are now around 500 vineyards in England and Wales and 5000 acres (2020 hectares) under vines. It reported also that 1 million vines are to be planted this year, and the current 5 million bottles currently produced is set to double over the next five years.

Vineyard

The UK wine sector repeatedly faces up to the general challenges faced by UK agriculture - including unreliable weather, managing pests and diseases, the advantages and disadvantages of different soil types, a variable climate and, not least, the potential for washout years. It has also benefited from new technologies such as satellite mapping, and could present many farming operations with a realistic, modern alternative for diversification – with the provisos that the soil is right, the land is south facing with good drainage, and the particular climate is generally favourable.

Peter Harker, a Partner at UK top 20 accountancy firm Saffery Champness, and a members of its Landed Estates and Rural Business Group, considers the establishment of a vineyard from a financial perspective.

A typical vineyard takes at least four years from initial planting of root stock to the harvest of the first full crop. Quoted costs for setting up from scratch are around £25,000 per hectare so cash flows will require careful planning and consideration. Expenditure to forecast, over and above land (if purchased), stock and hardware/trellising, also includes expert ecological and viticulturist assessments; labour costs for planting and maintaining the vines, and processing, marketing and selling costs.

The importance of cash flow forecasting at the outset of setting up a vineyard enterprise of any size will ensure that an understanding of expenditure levels is firmly established. This helps to plan any funding requirements and will inform decisions on how the funding should be raised. For example, external funding from banks or investors will require a forecast as part of a business plan before they will lend or invest.

As with many new enterprises, the first years of establishing a new vineyard as a standalone enterprise will inevitably show losses. This is, of course, as a result of both the delayed income stream as vines develop, and the initial cash outlay required for set-up costs and capital investment.

For a start-up business it is important to note that expenditure incurred prior to the commencement of trade - where income starts to be earned - cannot be offset against other profits until trading commences. Once the vineyard starts to trade, losses may be sideways loss relieved in accordance with the normal restrictions. Alternatively, losses may be carried forward indefinitely against future profits of the vineyard. Losses may be increased by capital allowances, which are granted on expenditure made on capital items such as plant and machinery for use in the trade, and can provide a very valuable tax relief.

Where an existing farm business diversifies and puts a part of the farm unit or estate under vines then it will be able to offset losses against other farm profits for the new venture from day one.

Averaging also provides a mechanism to balance good and bad profit years – from April 2016 the averaging rules were extended to cover a five-year period. This will be particularly relevant for the vineyard sector as there can be washout years where there are either no sales, or very little sales, of grapes to winemakers.

In a sector where there are such risks it is important that proper tax advice is sought early to ensure that such tax impacts are correctly modeled and opportunities are not missed.

Saffery Champness

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