Annual payments under the Sustainable Farming Incentive (SFI) and similar agri environment schemes are income. For a farmer who carries on farming, HMRC treats the management work the agreement pays for as husbandry, so the payments are receipts of the farming trade. Contributions towards specific capital works are capital receipts, and they reduce the expenditure on which capital allowances can be claimed.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questionsHow the cover worksAccountant? Offer cover to your clientsor call 01795 841 310

What do SFI and the other schemes pay for?

SFI pays farmers and other managers of farmland in England to carry out sustainable management actions on their holdings. Under the current SFI26 offer, an agreement usually lasts three years, almost all actions run for three years (some organic conversion actions are shorter), and the total annual payment is made in quarterly instalments. There is an annual agreement value limit of £100,000, and the separate SFI management payment that earlier agreements carried has been removed for SFI26. Earlier SFI 2023 and SFI 2024 agreements remain in force for their holders but are closed to new applications.

HMRC’s Business Income Manual at BIM55136 describes SFI as one of three environmental schemes replacing the Basic Payment Scheme in England, alongside Countryside Stewardship, which pays for more targeted actions on specific locations, features and habitats, and Landscape Recovery, which funds bespoke, longer term, larger scale projects. The tax analysis below applies to all of them, but each agreement should be read, because capital and revenue elements are often mixed.

Are SFI payments part of the farming trade?

For income tax, section 996 of the Income Tax Act 2007 defines farming as the occupation of farmland wholly or mainly for the purposes of husbandry. Section 9 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) treats farming in the UK as a trade and treats all the farming carried on by one person as a single trade.

BIM55155 says the deciding question for any farming grant is whether it is a trading receipt and whether it is capital or revenue, and that the main factor is the purpose for which it is paid. BIM55165 then deals with payments for managing farmland in a particular way. Where these are made annually, HMRC says there is no doubt that they are income. It goes further: the management a farmer carries out under the agreement comprises acts of husbandry, and although the agreement restricts what the farmer can do, the farmer remains the occupier for the purposes of husbandry and so remains a farmer under the statutory definition.

The result is that SFI income received by a working farmer is simply part of the farm’s trading profit. It is included in the same accounts as crop and livestock sales, it counts for farmers’ averaging, and it can help show that the farm is run commercially when the five year rule for farming losses is in point.

What if a lump sum is paid for several years?

BIM55165 notes that some farmers receive a single sum for managing their ground in a particular way for a period of years, and may argue it is capital compensation for sterilising the property. HMRC rejects this, relying on White v G and M Davies (1979), where partial sterilisation was rejected, because the farmer can still farm. Lump sums for management obligations are therefore revenue receipts.

Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

See my price in 2 questions or call 01795 841 310.

★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews

Which parts of an agreement are capital?

BIM55165 says contributions towards specific capital expenditure under a management agreement are capital receipts. Typical examples are grants towards new hedging, fencing, gateways or water infrastructure. These are not taxed as income, but they do not escape tax altogether.

Under sections 532 and 533 of the Capital Allowances Act 2001, explained at CA14100, a contribution towards qualifying expenditure is deducted from that expenditure, and allowances are given only on the net cost. It does not matter that the contribution comes from a public body, or that it arrives after the spending. For illustration, a farmer who spends £12,000 on qualifying equipment and receives a £5,000 capital grant towards it can claim allowances on £7,000 only. For the general framework, see are business grants taxable and capital allowances explained.

When is the income taxed?

BIM55160 says the starting point is accounts prepared under generally accepted accounting practice. Under FRS 102 Section 24, a business can account for grants using either the accruals model or the performance model; under the performance model, income is recognised when the performance conditions are met or, if there are none, when the money is received. HMRC says it will not normally challenge the basis used for farming grants as long as it is applied consistently and the whole of the payment is taxed at some point.

Because SFI is paid quarterly over a three year agreement, the main practical risk is inconsistency: recognising payments on receipt in one year and on an accruals basis in the next. Pick a policy that suits the agreement and keep to it.

What if the farm stops producing altogether?

The analysis above assumes farming continues. Where a whole holding is taken out of food production, the question becomes whether there is still occupation for husbandry. HMRC’s approach to the Basic Payment Scheme at BIM55128 is a useful guide: where production stops permanently, the farming trade ceases; if the ground is then managed on a commercial basis with a view to profit, section 10 ITTOIA 2005 can treat that as a separate trade; otherwise the income is miscellaneous income. BIM55128 also warns that a new trade under section 10 is a different trade, so losses from the old farming trade cannot be used against it.

HMRC’s statement at BIM55165 that management under an agreement is itself husbandry points towards the trade continuing where the farmer is still actively managing the holding. Each case turns on its facts, and the agreement documents and what happens on the ground are the evidence HMRC will ask for.

Who can enter an agreement, and why does that affect the tax?

The SFI26 scheme rules require the applicant to have management control of every parcel entered for the full duration of the actions chosen. Owner occupiers and tenants under a Farm Business Tenancy or an Agricultural Holdings Act 1986 tenancy can have management control. A landlord does not, because the landlord is not actively farming or managing the holding, and a contractor working under the direction of the owner occupier or tenant does not either. A licensee, such as someone with a grazing licence, is unlikely to have enough control unless the arrangement gives tenant like responsibilities.

This lines up with the tax position. The person who receives SFI money is the person actively managing the holding, which supports trading treatment. A landowner who lets fields to a grazier or tenant cannot normally hold the agreement, and the landowner’s income stays as rent or licence fees; see grazing licences and field letting income.

Does environmental management affect inheritance tax relief?

Most SFI actions sit alongside normal farming, so the holding usually remains in agricultural occupation. For schemes that take ground out of farming, section 124C of the Inheritance Tax Act 1984, substituted by Finance Act 2025 for transfers on or after 6 April 2025, treats property under an environmental management agreement as agricultural property occupied for agriculture if it was agricultural property for the two years before the agreement began and has since been used and managed in accordance with the agreement, whether or not the agreement is still running.

The agreement must be legally enforceable, made with a public authority, entered into to protect, restore or enhance the natural environment, and in practice require management that would otherwise stop the property being agricultural. Agreements that ended before 6 March 2024 are excluded. For the wider relief, including the £2.5 million 100% relief allowance, see agricultural property relief.

How might this look for one farm?

Illustration only. A tenant farmer under a Farm Business Tenancy runs a mixed arable and sheep holding with a 31 March year end. In the year she receives £24,000 of quarterly SFI payments for soil and hedgerow actions, a £6,000 capital grant towards new livestock handling equipment that cost £15,000, and her last small delinked payment.

  • The £24,000 SFI income is a trading receipt of her farming trade, recognised on the basis she uses consistently.
  • The £6,000 capital grant is not income, but her capital allowances on the equipment are given on £9,000 rather than £15,000.
  • The delinked payment is also farming income because she still farms; see how delinked farm payments are taxed.

What mistakes come up most often?

  • Treating multi year payments as capital. HMRC rejects the sterilisation argument for management payments.
  • Ignoring the capital contribution rule. Claiming allowances on the gross cost of equipment part funded by a capital grant overstates relief.
  • Changing recognition policy from year to year. HMRC accepts a reasonable basis applied consistently, not a mix chosen to defer tax.
  • Assuming a landlord can claim. Only the person with management control can hold the agreement.
  • Forgetting the inheritance tax conditions. Section 124C needs two years of agricultural use before the agreement starts and management in line with it afterwards.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.