The Country Land and Business Association (CLA) has written to Chancellor Gordon Brown urging him to address inequalities in the current tax system that force extra burdens onto rural businesses.

CLA Regional Director North, Douglas Chalmers says: "Diversification into non-agricultural activities is essential for the survival of many farm businesses and the growth of the rural economy. But the distinctions between different types of operations made by the current tax regime is a major hindrance to many country businesses, which are becoming increasingly mixed in nature."

For example, a farm with a farm shop, tourist accommodation, livery and commercial lettings of redundant barns is a mix of Schedule A and Schedule D activities - an artificial division under the current tax system. Thus the farmer has to prepare separate accounts for each of the diversified activities in order to complete income tax returns.

"This takes time and money, and both these commodities are scarce in smaller businesses, especially those just starting to diversify," added Mr Chalmers. "So in fact, the current tax system simply creates a disincentive to enterprise. It also means that profits earned in one section of the business cannot be offset by losses made in another. We want to see all activities carried out under the umbrella of a single economic enterprise treated as one business for income tax purposes . "

The CLA is urging Gordon Brown to remove the fiscal boundary between Schedule A and Schedule D and treat all activities carried out under a single economic enterprise as one business for income tax purposes.

The Association is also making two further recommendations to the Chancellor. Firstly, that landlords should be granted the right to defer payments of capital gains tax from the sale of assets when the payments are re-invested into let units. Secondly, that the definition of agriculture, for the purpose of agricultural property relief from inheritance tax, be widened to ensure both landlords and their tenants can consider diversification without the landlord incurring future capital tax liabilities .These two recommendations were also proposed by the Tenancy Reform Industry Group, which presented its recommendations to Ministers in June.

Under the current tax system, when a tenant wants to diversify into non-agricultural activities on an existing agricultural holding, the landlord will lose his agricultural property relief from inheritance tax . This may mean it is in his interest to resist diversification, despite its potential benefit to both the tenant and himself.

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