Too many arable farmers are spending too much on machinery in a bid to save tax, warns Nick Tapp, head of agribusiness at Bidwells.
“There is a real danger that the tax tail is wagging the commercial dog, and that more farsighted opportunities for business development are being squandered in favour of short term savings,” said Mr Tapp.
Growers needed to remember the lessons learned about production costs when grain was £60/t rather than pursuing their passion for metal.
“Successful farming businesses in the decade to 2007 managed costs ruthlessly, driving efficiencies in the production of wheat at £60/tonne, growing their businesses and being perfectly placed to take advantage of an upturn in the market.
“Now that the upturn has arrived, many of those lessons are being forgotten. Cash is invested in depreciating assets (and depreciation is a real cost), costs per tonne or per ha are no longer king.
“Too often farmers wait until the bank manager is knocking at the door before looking ahead and planning for the future. With the bank holding all the cards, your choices are inevitably limited. With cash in your pocket you can make the choices for the future.”
Bidwells’ advice is to set a five to eight year machinery replacement policy and a five year capital investment plan so profit spending can be properly allocated.
“There is a real danger that the tax tail is wagging the commercial dog, and that more farsighted opportunities for business development are being squandered in favour of short term savings.”
Nick Tapp, Bidwells
Depreciation typically represented up to 35% of machinery costs on arable farms and it was important to understand the tax implications of investment, said colleague Ian Ashbridge.
“There’s a danger of thinking: ‘I’ve made a profit, now I’ve got to do something with it otherwise I’ll get hit with a tax bill’, and pushing this new found working capital into machinery which will depreciate quickly and erode your initial gain.”
A proper capital plan for replacement of essential kit would prevent this. Equally important was understanding the tax situation – depreciation cannot be set against profits to minimise tax liability and capital allowances in the form of the Annual Investment Allowance had been substantially reduced.
It was also important to consider other investment requirements which may put the business in better shape, for example operational essentials like grain storage, grain handling plant, tracks and roads, office and IT, as well as alternative investments in non-core farming enterprises.