Advice on improving farm year-end planning and profit forecasting

Year-end planning in farm businesses needs to improve so that investment decisions can be taken in a considered and timely manner, say advisers.

Considerations include a careful assessment of any proposed plant and machinery investments, says Nick Banks, a partner with accountant Scrutton Bland.

See also: Advice on minimising IHT impact on pensions

“Well diversified farms with Sustainable Farming Incentive income are likely to have taxable profits in the year ending 31 March or 5 April, and almost all businesses need to get more sophisticated with financial forecasting so they can make sensible judgements that are not purely tax driven,” he says.  

Plant and machinery

“There will be a tax benefit through capital allowances on eligible plant and machinery purchases but consider the debt burden this is likely to create on the back of tight margins in combinable cropping businesses, for which this year is a survival challenge.”

Spending annual depreciation is a further risk. Depreciation is a non-cash deduction or expense which reduces the reported profit and tax liability of a business, essentially keeping profit in the business to cover reinvestment needs. This needs to be recognised and planned for.   

Machinery sales

Some farmers are rationalising machinery to bring in cash but where capital allowances have been claimed on the kit sold there is a risk that if it is not replaced, there will be a balancing tax charge on the sale proceeds, Nick points out.  

Changing capital allowances

While full expensing remains available to companies (allowing 100% of expenditure on eligible plant and machinery to be set off against income in the year of purchase), sole traders and partnerships have an annual investment allowance (AIA) for 100% of qualifying expenditure up to £1m.

For most businesses the AIA is sufficient but if it is wholly used, there is also a writing down allowance (WDA) on further purchases, of 18% or 6% depending on the asset type.

However, the 18% rate falls to 14% from 6 April 2026, calling for an assessment in case it is tax efficient and affordable to bring forward any qualifying investment into the current year.

The reduction in WDA is offset by a new first year allowance of 40% introduced from 1 January 2026 where eligible expenditure qualifies.

Losses

Trading losses can be offset against other income in the same year or carried back.  

Farmers averaging

Where profits are squeezed, or there are losses, the opportunity to average profits over two or five years should be weighed up.

“This is a decision to be made after the year end,” says Nick.

Averaging can bring a cashflow benefit as well as lowering tax bills and may be relevant this year for some arable businesses that have not considered it in the past, say advisers.

Repairs

If repairs are needed, for example to buildings, tracks or concrete yards, these are wholly allowable expenses in the year they are incurred, so where it is logical and affordable to spend this before the year end, it will reduce profits.

Partnership profit shares

Where partnership profits are large and shares could go above £100,000, the personal allowance of £12,750 is at risk, as the allowance is reduced by £1 for every £2 of income above £100,000.

Where an individual has an income of £125,140, the personal allowance is wiped out by this reduction.

“Consider revising partnership shares or utilising pension contributions to avoid such a loss,” says Nick.

Personal tax

Pension contributions, where affordable, still offer a good level of income tax relief and should be part of a succession plan.

This applies for company directors too but Nick cautions to check that the contributions will be eligible.

If the company makes employer contributions to a personal pension for a director-shareholder, there are two advantages: The company gets tax relief and saves on national insurance contributions (NICs), while the director-shareholder gets a benefit free of tax and NICs.

The company can also make pension contributions for a spouse, children, or other family members employed in the business, provided these meet the rules.

Nick recommends a remuneration “health check” for director-shareholders to ensure the most tax efficient methods have been used.

This includes taking account of a two percentage point rise from 6 April in the dividend rate for basic taxpayers, to 10.75%, while higher rate tax payers will be charged 35.75%.

The rate for additional rate taxpayers stays at 39.35%.