Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.
Here, Mark Chatterton of accountant Duncan & Toplis advises on the tax implications of a positive arable cash position and how to use them to prepare for Brexit.
Q: We expanded our business five years ago to 700ha of owned, rented and contracted-in land. Remarkably, this year we have not needed our bank overdraft facility and our loans are steadily being repaid. With all the fear of Brexit, what should we plan for the future?
A: Your increased profits from expansion are finally being seen in terms of cash flow and the improvement in your bank balance. This takes time as you have funded extra variable costs and most likely hire purchase commitments for the first few years.
We advise that you budget for the next 10 years as there is some certainty regarding the Basic Payment System and potentially other subsidies. Your machinery replacement plan should be the starting point.
It may be a good idea to try to get the commitment from the contract and rented land to cover the 10-year timescale, to give certainty
If, over the next 10 years you are farming the same area, I expect you will need to replace amongst other things the combine, sprayer and big tractor. If using hire purchase then a good plan is to try to achieve level annual payments over the period.
Your cash flow budget should also include larger tax payments.
As you expanded five years ago, your machinery purchases will have benefited from the Annual Investment Allowance (AIA) writing off 100% of the cost as a capital allowance against taxable profit.
The AIA now stands at £200,000 a year for each business but has been as high as £500,000 in the past. Your taxable profits would have been lower in the years you bought machinery.
As you will have claimed most of the available capital allowances on earlier equipment purchases, your tax pool now will be low, or may even be zero, and there will be minimal or no capital allowances to claim in the years that you do not spend on replacing machinery.
This means that each year your taxable profit will always be higher than your accounts profit.
If you operate as a company, your corporation tax, currently 19% and due nine months after the year end, will be higher for the same reason.
If you are not incorporated, the partners could be well into the 40% tax bracket or maybe the highest rate of income tax (45%).
Your balancing income tax payments due on 31 January will be higher than the on-account (advance) payments, which were based on lower profits in previous years.
We are seeing this with other clients and January 2019 tax bills could be higher for the majority of arable farmers.
Now that you are generating surplus cash flow, other expenses to be budgeted for include building repairs and investment, as well as topping up pensions for the owners of the business, which is also tax-effective.
Finally. ask yourself what you want the business to look like in 2028. You will all be 10 years older. Should a business restructure be planned for and the cash generated at present used appropriately?
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