Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.
Here, Mark Chatterton of Duncan & Toplis advises on a tax question that will be familiar to many farmers this year.
Q. Due to low winter cereal planting, my profits for harvest 2020 will be very low. Should I consider holding back on selling harvest 2019 to smooth the profits of the two years?
A. Our answer in short is no. There are other ways to achieve the same goal.
Crops should be sold for commercial reasons to achieve the best price. A selling strategy should take into account cashflow requirements, but not second guessing future income tax payments.
Crops in store can be valued at cost of production or on the deemed cost method (75% of market value).
The tonnage should be accurate and agree with post year-end sales when completing accounts later in the year.
Most farm businesses have a 31 March or 5 April year end, so many arable units will have some crops in store at each year end and some profit will always be deferred into the following year.
There are some basic tax planning points to reduce the 2020 taxable profit and increase 2021 taxable profits from the expected lower 2020 harvest.
Farmers’ averaging has been available since the 1970s and will really come into its own when looking at 2019 and 2020 harvests in preparing 2021 year ends. It is available for sole traders and partnerships.
The relief allows averaging the profits of two consecutive years if the lower of the two profit figures does not exceed 70% of the higher profit figure, or if one of the years shows a loss.
The averaged figure is then used with the next year, and so on.
Arable profits were quite high for harvests 2017 and 2018, and using averaging has meant that assessable profits have risen more gradually.
When preparing 2021 returns, averaging will smooth the decrease in profits from the (expected) poorer 2020 crops.
Deferral of capital allowance claims can also be used. With the annual investment allowance now at £1m/year for each business, most machinery purchases receive 100% tax relief in the year. If not needed, this relief can be deferred.
As machinery spending is likely to reduce in 2020-21 due to a lack of cash, it is essential to look at your capital allowance claims when preparing 2020 returns and plan forward.
Companies can take advantage of these capital allowance rules too.
All businesses have their own unique financial structure. Please speak to your accountant to help devise your optimum strategy to get through the 2020 growing year.
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