Farmers face a “cash crisis” over the next year as higher variable costs, lower commodity prices and hefty tax bills have combined to put cash flow under real pressure, Grant Thornton has warned.
The firm’s latest farm business survey – which covers 10,000 arable acres in central, eastern and southern England – predicts net farm income for the top 25% of wheat producers will fall to £112/acre for the 2009 harvest, down from £258/acre in 2007 and £132/acre last year.
Higher variable costs for the 2009 crop, especially fertilisers, sprays and fuel, are a big factor behind the fall. Variable costs for the top 25% this year are expected to be £201/acre, up 88% from 2008. What’s more, many farmers had to fund these higher costs before selling the 2008 harvest crop and at shorter credit terms than usual given the tighter money markets.
Higher tax liabilities after increased profits during the past two harvests have added a further squeeze on cash flow, says Grant Thornton’s Gary Markham. The next tax payments for partnerships and sole traders are due this July, but many face substantial tax bills next January and July 2010, he says.
“Generally, farmers have been able to have a good idea of the monthly cash position at the same time as getting on with the day-to-day management of the farm. This survey makes it very clear that this approach is not good enough and farmers need to spend time producing detailed long-term forecasts. Failure to do so could result in a catastrophic cash crisis in future years.”
Sharing labour and machinery can significantly reduce costs, as can buying groups or contractors. But there are many things farmers can do to reduce potential tax bills and, therefore, ease immediate cash flow, he said.
Grant Thornton tax tips
• Time big expenditure to maximise tax allowances. For large purchases on hire purchase, remember new equipment must be brought into use before the financial year ends to qualify for the new 40% allowance
• Review existing family tenancy agreements. Only get 50% IHT relief on old AHA tenancies
• Change end of tax year to maximise overlap relief. Many farms have 31 March year-ends. Changing this to 30 April can defer tax bills by 12 months
• Consider tax-efficient investments, such as SIPPS. These qualify for full tax relief and are VAT registered. Can be used in purchase of new buildings eg, grainstore
• Review business structure and consider the use of a corporate partnership. A new company could be established to ease tax burden on a partnership
• Ensure timing of sales is tax-efficient and appropriate valuation is used. Grain in store needs to be valued at actual cost, not deemed cost (75% of market value)
• Use averaging to reduce payments on account. As taxable income falls, farmers should elect to pay less on account, but don’t reduce too far
• Consider changing profit sharing ratios between partners to maximise use of those on lower tax bands
* For more on this story, visit Phil Clarke’s Business Blog