Farmers who diversify to boost profitability will be hard hit financially if controversial proposals for a new 'land tax' are included in the chancellor's pre-budget report later this month.

The Planning Gain Supplement or 'land tax' would be levied on the increase in the value of development land after planning permission has been granted, warns UK top 20 accountancy firm Saffery Champness.

The controversial proposal was first suggested by Kate Barker, a member of the Bank of England's monetary policy committee, in 2003 and has since gained support from the government, with many commentators predicting its inclusion in the pre-Budget report.

"It is increasingly common for farmers to stop farming as the amount received under the Single Farm Payment scheme is now unrelated to production," says Mike Harrison, a partner at the North West office of Saffery Champness.

Their buildings, which were previously used in the farming operations, are now redundant and are likely to be converted into offices and residential units. However, development of this type would be subject to the new land tax creating an additional tax charge and therefore further cash flow pressure on farmers.

Mike Harrison continues: "A land tax will be another nail in the coffin for some farmers. Poor profitability and the delay in single farm payments until next spring has put many farmers under severe cash flow pressure this year, but diversification has offered an alternative income stream. A land tax would impose an additional financial burden on diversification plans, even when the farmer has no plans to sell the land."

Mike Harrison added: "With a potential land tax on the horizon, it would be advisable for any farmers with planning applications currently in progress to try and push ahead with urgency. Those looking to diversify in the future should review their land holdings and work a potential tax charge into their cash flow as a cost of investment."

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