Cumbrian First Milk farmers look set to see a sharp drop in the value of their investments.

According to a Carlisle accountant, the co-op’s decision to convert member loans to shares, announced back in March, would lead to farmers losing out on any tax relief.

The move was carried out by the co-op, which owns the Lake District Creamery at Aspatria, in a bid to improve its balance sheet.

Cumbrian farmers who had left the co-op and expected payouts worth thousands of pounds were disappointed and angry when the news broke.

The previous year former members of the farmer-owned co-op were furious when they were told they would not receive their capital contributions for another 12 months - and even then payments would be staggered over three years.

But continuing First Milk members could also lose out.

Rob Hitch, a partner at accountant Dodd & Co, said First Milk was proposing to convert all members’ capital accounts and ‘B’ preference shares to new ‘C’ preference shares if approved at the Extraordinary General Meeting on July 1.

“This will mean that First Milk repays all of its debt to members by the issue of ‘C’ preference shares,” said Mr Hitch. “This is the crux of the issue.

Rob Hitch “We don’t know exactly what these shares will be worth, as the latest accounts available to members are the March 31, 2015 figures.”

Members’ capital totalled more than £50m in that year, but First Milk only had a net asset value of £6m, some 12 per cent of the value of members’ investments.

“This was reflected in the value of ‘B’ preference shares traded last year,” said the accountant.

Mr Hitch added that even though there is a big loss in the value of those shares, individual businesses and partnerships will not be able to claim any tax relief.

“This is where the tax rules seem to disadvantage individuals over corporate businesses. As explained above the total value of members’ investments is being repaid by the issue of ‘C’ preference shares. So there is no loss on the exchange,” he continued.

“Unfortunately, and the basis for this can be found in HMRC’s brief about the Dairy Farmers of Britain restructuring here, HM Revenue & Customs will use the valuation of the shares at the date of exchange as their base cost.

“This could be as little as 12 per cent of their face value as described above. So potentially there is an 88 per cent loss in the value of the shares that will not attract any tax relief, and the base cost for Capital Gains Tax going forward will be market value on July 1.

“The situation is better for corporate businesses, who will be able to claim an income deduction for the loss.”

Cumbria’s beleaguered dairy farmers are hoping that the news that Meadow Foods has increased its milk price is a sign that the market is showing the green shoots of recovery.

The UK’s largest independent dairy, which is supplied by around 550 suppliers, including many in Cumbria, is to increase the A-litre milk price by 2p/litre over the next two months.

This will take the standard litre milk price to 19p/litre, following a 1p/litre drop which took effect from June 1.

The company is also saying the B-litre price for July and August will be “significantly improved”.

Kirkoswald dairy farmer, Les Armstrong, who supplies Meadow Foods, said it was positive news and helping to make people feel differently. “But there is still some way to go before the pressure is lifted from producers.”

Simon Chantler, executive chairman at Meadow Foods said: “We feel that the slowdown in EU milk production over the flush period, and a general tightening of supply are offering a better market outlook.”