SOFTENING THE BLOW OF A TOUGHER TAX REGIME…
What can be done to help
minimise the impact of new
tax regulations, asks
Grant Thornton partner
Carlton Collister ?
THE new system of income tax payments has caused cashflow hardship for dairy producers in a time of reducing profits. So how can this hardship be minimised?
The new payment on account system for individuals bases current-year estimated tax payments on last years total tax on all sources of income. That means that now profits are falling, payments on account made on Jan 31 and July 31 will probably be too high. But steps can be taken to reduce these payments:
Where you know that profits will be lower, you can apply to reduce tax payments made. However, where they are reduced too much then interest – currently at 9.5% – is payable on tax paid late. Penalties may also be due if the Inland Revenue considers that an excessive reduction has been made without documentation supporting the reduction.
Where a loss is made in the later year, then a claim for repayment can be submitted to the Inland Revenue. It may therefore be important to ensure that accounts are completed quickly.
Averaging farm profits may also be beneficial where higher rate tax is paid in one year or where allowances are not fully used.
Under self-assessment, claims must be made by individual partners, rather than by the partnership as a whole. While this means that overall tax payable should be minimised, it increases paperwork involved.
It may be worthwhile considering a change of year end date, moving closer to the end of the tax year, as this may accelerate loss relief or use overlap relief – a relief created because the business does not have an April 5 year end. However, the effect on the business must be considered as well as tax issues, which may mean that a change is not practicable.
There may be advantages to gain from considering treatment of BSE compensation payments and its interaction with herd basis. This is a complex area as it depends on herd values for tax purposes, the scheme under which payments are made and the proportion of herd animals disposed – including normal sales – without replacement in the year.
In broad terms, compensation payments are only non-taxable if there is a disposal of more than 20% of the herd without replacement within five years. If compensation is made under the BSE suspects or selective cull scheme, and the replacement animal is of inferior quality then the profit may be tax free.
From April 6, 1998 new rules for capital gains purposes mean that milk quota will no longer be pooled. The pool of milk quota allocated or purchased from 1984 to April 5, 1998 will continue to be treated as a single pool, with average price of all quota, including allocated quota, being given as a deduction from sale proceeds, but subsequent purchases will be recorded separately. On a sale after April 6, 1998, the disposal will be matched with acquisitions on a last in, first out basis.
For some, selling cattle and milk quota now appears the only option. It is then important to structure disposal to ensure that retirement relief is available against the capital gain on the sale of milk quota. Matters have now been clarified and complete retirement on a land sale is not necessary in order to obtain retirement relief. However care still needs to be taken to ensure relief is available.
For example, where other farming enterprises are being continued then dairy business assets must be sold simultaneously, with cessation of the dairy enterprise, to ensure that retirement relief is given. *