Support Changes may mean Tax Trouble ahead for SFPs
UNDER THE existing support regime, arable subsidies are normally accounted for when the crop is sold and livestock subsidies when the payment is received. This will all change with the arrival of the new single farm payment because it is decoupled and not related to commodity production.
Although the Inland Revenue has not yet said how it will tax the payment, it is probable that it will be considered revenue income to the farming business and will be taxed in respect of the period to which it relates.
This might mean the calendar year or it could be the farmer”s chosen 10- month period (for example, Oct 2004 to July 2005 for an arable business). The implications are likely to be most severe for farms with a financial year end in the autumn, such as the traditional arable Sept 30 date.
On a 400ha (1000-acre) arable farm with a September year end and with sufficient grain storage for the entire harvest, the aid payment relating to the 2004 harvest will be coupled to the commodity in store on Sept 30, 2004.
Because convention permits the subsidy to be included at the 75% rate only, 25% of its value will be deferred to the 2004/5 financial year. But on Sept 30, 2005, while the crop might be in store, the new SFP will be decoupled and it is likely that its entire value will be taken into account in the 2004/5 profit.
As a consequence, tax will be payable on the entire SFP, plus the 25% deferred from the 2004 aid payment. That will add about 50/ha (20/acre) or 20,000 to this farmer”s profits and result in an increased tax bill of 8000 (for a 40% taxpayer) despite there being no greater cash generation from the business.
And, while the arable subsidy would normally arrive before Christmas, the SFP is unlikely to be made until the following spring, resulting in a higher tax charge but less money with which to pay the January instalment.
For livestock enterprises, the implications are similar. The Sheep Annual Premium is currently paid around October, and beef subsidies in two tranches, before Christmas and in the following spring.
Most farmers account for these on the date received. It is likely that some of the SFP will appear in accounts earlier than the headage payment in the past. Depending on year-end date, some businesses might end up with two years of subsidy in one set of books, even though the business has generated no more cash and indeed the cash flow is worse than it was before.