Farming businesses will be allowed to average profits over five years instead of two, announced the chancellor in the Budget on Wednesday (18 March).
This will be available from April 2016 and only to sole traders and partnerships, not companies.
The measure is expected to cost the Exchequer and save farming businesses £30m/year from 2017-18.
However, if the new averaging rules survive the post-election Budget, very large fluctuations in profit would be needed for the provision to offer real savings, said Carlton Collister of rural tax consultant landtax.
Sole traders generally stand to gain most, but taking the profits of a typical 400ha arable business over the past five years, such a business would not necessarily save anything from the measure, whether sole trader or partnership, said Mr Collister.
Tax savings would come when such farmers had other income from diversification (such as rental) which used the personal allowance and pushed income into higher rate bands.
Farming results for tax purposes could be significantly skewed by “lumpy” expenditure such as repairs and machinery, especially with large variations in Annual Investment Allowances (AIA) over recent years, said Mr Collister.
The chancellor also said he would set a much more generous rate for the AIA, which is set to drop to £25,000 in January.
The AIA is at £500,000 and offers the ability to set off anything up to this amount spent on machinery and equipment against income in the year it is spent.
Other positive measures for farming included:
- Self-employed class 2 national insurance (NI) contributions to be abolished
- No fuel duty increase in September
- Personal tax allowance to rise to £11,000 in 2017-18
- Higher rate tax threshold of £43,800 by 2017
- Tax on first £1,000 of savings income abolished – first £500 for higher rate tax payers
- No NI charges for young apprentices from April 2016.
The Budget also proposed the abolition of the annual tax return, with information being automatically uploaded to new digital tax accounts.
Budget risks for farming families
Deeds of variation are to be reviewed, the chancellor proposed.
These can be used by families following a death and when a more favourable tax outcome could have been achieved than by following what is set out in a will.
Deeds must be arranged within two years of death and all beneficiaries must agree to the changes.