by David W G Taylor
The taxation of woodlands has always been meat and drink to the prophets of doom and the claims of loopholes in the tax legislation gave scant recognition to the longevity of the tax provisions which date, in essence, from 1916. Although subject to fine tuning of one sort or another over the decades, the formula up to the 1988 Budget had evolved to fit the practical requirements of the forest quite well, and this practicability had itself spawned a whole profession of consultants, advisers and contractors to service a clientele largely motivated by a variety of different tax benefits.
Those within the industry have long ago learned to cope with predictions of change. Over the years a whole series of reviews, reports and inquiries not only came up with the answer that the existing system worked but found it extremely difficult to think of anything better. Best of all, tax rebates on the scale arising from forestry were almost totally invisible to the Exchequer, so that the structure encouraged private forestry without seeming to cost anything. By 1987 the annual cost was estimated at between £10m (the Government) and £35m (the Opposition) pa — barely worth, surely, all the over-inflated ballyhoo.
So foresters had, perhaps, in recent years become a little complacent in their attitude to Government forestry policy. The case for home-grown timber is a good one. The importation of wood and wood products into the UK costs us, each year, as much in foreign exchange as the total out-turn of the North Sea. A staggering £4.5bn pays for about 90% of our needs. The balance comes from a rapidly maturing national forest — upon which incidentally successive governments have spent a mere £1.5bn or so in the 40 years since the end of the second world war. This is equivalent to the cost of imports at current levels for 132 days!
So we have a huge untapped market and the ability to produce timber which competes directly, in a free world market (if a market in which the Soviet Union plays a major role can ever be truly described as unfettered) with imports in strength and quality standards. We have a magnificent new timber-processing industry which has seen over £600m invested in new plant over the past five years.
And we have a land-use policy in which the needs of food production are ever-declining, a feature which could be logically expected to favour an expansion in forestry. Finally, we have a Government forest policy which sets ambitious targets for new investment that, even before the Budget, the industry showed little sign of achieving.
The confidence of the industry fed off these ingredients, but chose to ignore some more insistent clouds on its horizon. Both the Prime Minister and the Chancellor have repeatedly trumpeted their intention to reduce the burden of direct taxation, especially at the upper levels. As top tax rates continued to fall the viability of forestry as an investment suffered. Ironically, the market for land held up well as competing forms of tax planners’ favourites fell by the wayside. Industrial building allowances came and went; leasing expired. Forestry began to look a little isolated, and when a series of tactless land transactions in the north of Scotland provoked the ire of the powerful conservation lobby, things began to go very wrong. The hitherto-unremarked Flow Country of Caithness became the soggy battleground between conservationists, led by the RSPB and the Nature Conservancy Council, and foresters, supported by Terry Wogan and several other substantial tax claimants. Hardly a fair or promising line of battle for the foresters, and in spite of local support, the industry suffered a humiliating and sustained public relations hammering.
So, come Budget Day, a change was very much in the offing. However, the emphatic and far-reaching changes announced in the Budget speech were not expected. Such were the complexities of woodland taxation that the news that forestry is to be taken out of tax was treated with gloom and despondency, whereas the same rules applied to almost any industry would have led to euphoria. The reasons are easily apparent. A rotation of trees requires a short period of heavy cost followed by a long period of negative cash flow which finances maintenance, insurance and administrative costs. This is followed by a period of sporadic income from thinning the plantations. Finally, there is a significant realisation of capital. Traditionally, the establishment phase of perhaps 20 years or more could be sustained by pre-tax income from other sources. This softened the blow of routine annual costs and made climatic or biological problems less grave. For a high taxpayer, net costs remained within bounds. And for the established contractor/consultant forestry companies, profitable turnover was readily available.
The industry had braced itself for a fall in the top rates of tax but was ill-prepared for a major rethink of forestry incentives. In the time-honoured phrase used by Chancellors when talking about forestry, Mr Lawson “recognised the special long-term nature of the industry”. He promised direct grant aid to replace the lost Schedule D benefits. This was duly announced by Malcolm Rifkind, Secretary of State for Scotland, a week later. A new grant scheme, the Woodlands Grant Scheme, replaces all previous arrangements. Grants are triggered by planting and are much increased to the level of perhaps half the establishment cost on larger schemes, and even more on smaller plantings.
These payments come in three instalments which vary a little depending on the nature of the scheme, but are likely to pay around 70% of the sum due on planting, with the balance in two instalments of 20% and 10% after five and 10 years. Grants are, of course, free of tax. No other form of grant payment is due except for neglected woods and, in certain circumstances, for the forester’s Holy Grail — natural regeneration.
This looks attractive at first sight. However, it is clearly targeted at the hill forestry type of planting and gives no support to the lowland proprietor, who has to face up to continuing expenditure on maintenance. One thinks inevitably of those whose woods need restoring after the ravages of the hurricane in the South East of England, where application of the new scheme looks of limited value. Part of the new scheme is an insistence on increased diversity in plantations, but the nature of fixed grants militates against high specification, or good quality, or additional costs on non-economic benefits. Ironically enough, the cheap, extensive plantations of the Flow Country look a better bet under the grant scheme than they did with tax relief at, say, 50%.
For the tax changes there is a transitional period. Existing woodland owners managing their woods under a Dedication Scheme, a broadleaved planting scheme, or a Forestry Grant Scheme, can sustain their existing arrangements, tax relief and all, to the end of their current plan of operations and, it now seems, beyond. Those who have already applied for entry to any of these schemes and whose plans are now approved may benefit for up to five years, in so far as this constitutes a benefit. Provision is made for the new Woodland Grant Scheme to run with Farm Woodlands Schemes, and an additional £200 per hectare is payable on the Woodlands Grant Scheme for planting land reclaimed or reseeded in the previous 10 years.
For landowners, whether in the hills or the lowlands, woodland grants are becoming more and more attractive. One is tempted to wait before planting to see what might be forthcoming in Woodland Grant Scheme (Mark II) in 1989, but it is to those who already own land that the scheme has its most obvious appeal.
These changes will affect woodland values, especially for property where tax relief was a strong motivation for ownership. Planting land in the uplands now looks strongly over-priced and we can expect a rapid readjustment to perhaps 50% of current values. In older woodlands, especially those in production, the effect will be very much less marked and lowland woodlands of almost any sort are not likely to suffer at all. The annual planting programme will inevitably decline, at least until a new breed of woodland investor attracted by substantial grant aid rather than tax relief can be lured into the woods.
With low land values and high productivity a strong case can be made for investment in new planting. Any programme will come from a different set of planters to the traditional tax-inspired absentee owners, and it will certainly be a year or two before the financial ingredients are right to generate planting on any scale. There is an even greater need for sound professional advice.
The trees, meanwhile, are totally unaware of any of these changes and continue to grow rapidly.