Advice on keeping accurate farm accounts to pay the right tax
© GTMedia/iStockphoto Efficient bookkeeping is fundamental to producing timely and accurate accounts for both tax and management purposes.
Many arable farmers have March year ends and are likely to drop out of the higher rate tax bracket for the year ending March 2026.
See also: Farm tax: opportunities, deadlines and updates
This makes it all the more important that accounts are up to date, allowing a reliable profit estimate to be made so that payments on account due at the end of January can be reduced, says Mark Chatterton, head of agriculture at accountant Duncan & Toplis.
He also highlights some errors in farm bookkeeping and financial records.
Beware of double counting
A common mistake is to put invoices on the system and then fail to match the later payment of that invoice to the invoice already on the system, he says.
“As a result, the payment also gets put to the expense code and it doubles up. It’s a classic error, it makes the management reports inaccurate and it’s not until the bank reconciliation is done that it comes to light,” says Mark.
“The first thing we check is the aged payables report, which highlights invoices that have not been matched.”
Correct allocation of spending
Spending on property is sometimes misallocated between improvements and repairs, he says.
An improvement is capital expenditure, attracting capital allowances at vary-ing rates, while repairs are 100% allowable as a business expense against income.
Buildings attract only a 3% capital allowance, the structures and buildings allowance, while under the £1m annual investment allowance (AIA), plant and machinery qualifies for 100% capital allowances in the year of expenditure.
This means it’s important to get detailed quotes and invoices for any project because much of the expenditure that makes up the remainder of the building might qualify as plant and machinery, attracting the far more favourable 100% available through the AIA.
This is a good time of year to consider how you are bookkeeping, says Willem Puddy, a partner with accountant Old Mill.
Alongside correct coding of expenditure, reconciling the bank statements with financial records such as the cashbook or accounting software can help to identify errors and missed transactions.
Willem highlights how the correct coding of expenditure in bookkeeping helps produce more valuable management accounts and cautions against a common error, which is to put tax paid into an expense code rather than a balance sheet code.
“Tax is not a business expense, and coding it as an expense makes the profit wrong, effectively reducing the profit and making the management accounts inaccurate,” he says.
Accounting for debtors
Willem also points out that many arable farmers do not account for income until it is received.
“However, if you have contracted to shift harvest 2025 crops, that can go into the [bookkeeping] system as a debtor; it’s not your stock. This again makes the management accounts more useful.”
Restructuring
With personal tax bands frozen, even without inheritance tax relief reform there would be a relatively high level of restructuring going on in farm businesses, says Willem, because of the increasing cost of living driving the need for higher incomes and the need to ensure the most tax-efficient structure for the business.
Making tax digital
From April 2026, many farmers who are sole traders will have to comply with the HMRC’s next new requirement under its Making Tax Digital (MTD) initiative, requiring them to report income and expenses quarterly.
This only affects sole traders who have a combined gross income from self-employment and property of more than £50,000 in the
2024-25 tax year. This qualifying income figure of £50,000 is from all self-employment businesses and property lettings and before the deduction of expenses.
Other income, such as from employment through pay as you earn or dividends, does not count towards the threshold.
The income threshold will fall to £30,000 from April 2027 and possibly to £20,000 from April 2028.
Those affected must:
- Keep digital records of their income and expenses using MTD-compatible software.
- Submit a summary of their income and expenses to HMRC every three months (quarterly) directly through their MTD software.
- Make a final declaration after the fourth quarterly declaration to finalise their income tax position for the year. The deadline for this final declaration is 31 January following the end of the tax year.
- Use software that is MTD compatible for income tax to create and send their updates to HMRC.
Anyone for whom it is not “reasonably practical” to use digital technology due to age, disability, or a lack of internet access can apply to HMRC for an exemption.
“There’s time to prepare for this; people should be getting ready in the new year,” says Willem Puddy of Old Mill. “The first quarterly report is due on 7 August.”
Online platforms must report sellers’ income to HMRC
With effect from January 2025, digital platforms must report to HMRC the income received by sellers of goods and services on their platforms.
The reports must be made annually in arrears on a calendar basis, with the first report due by 31 January 2026.
Digital platforms cover many goods and services, including the letting of short-term accommodation, such as through Airbnb and holiday booking agencies, whether for short-term stays, holidays or in the private rental market.
A copy of the information reported to HMRC must be provided to the taxpayer.
“The letting of short-term accommodation, covering both holiday letting and ordinary tenancies, via a digital platform, will be subject to these reporting rules,” says Ben Wilkinson of accountant Chavereys.
“So if, for example, a holiday cottage is let via an online agency, the agency is obliged to report the number of transactions and quarterly total of all payments made to the owner of that property; along with details of the fees and commissions charged to, or withheld from, the owner.
“The rules cover both UK resident and non-resident owners.
“If an online platform is used to manage the letting of properties subject to shorthold tenancies, that arrangement may also be caught.”
Other information that must be supplied includes:
- Address of the property
- Name, address and birth date of the owner, details of the bank account into which rent is paid and tax identification number of the individual or business.
- Where relevant, the VAT number must be supplied.
It is expected that HMRC will compare the information with tax return entries.
HMRC to resume taking tax owed directly from debtors’ bank accounts
HMRC is running a test phase for resumption of its powers to take tax owed to it by debtors directly from their bank accounts.
These powers, known as HMRC’s Direct Recovery of Debts (DRD) policy, have been used only infrequently in the past and were paused during the Covid-19 pandemic.
The policy is aimed at individuals and businesses who can afford to pay their debts but deliberately choose not to, says HMRC.
The power allows HMRC to compel banks and building societies to transfer funds directly from a debtor’s account, and/or funds held in cash individual savings accounts.
It applies to debts of £1,000 or more, with safeguards against undue hardship and for vulnerable customers.
Safeguards
The safeguards include:
- Only taking action against those who have established debts, have passed the timetable for appeals, and have repeatedly ignored HMRC’s attempts to make contact. Anyone who disputes the amount owed has the automatic right to appeal.
- Guaranteeing that every debtor will receive a face-to-face visit from HMRC agents before their debts are considered for recovery through DRD.
Such a meeting will include HMRC personally identifying the taxpayer and confirming it is their debt, explaining what is owed and why payment is being pursued, also to discuss options to resolve the debt, including offering a payment plan to the debtor, where appropriate.
Debtors who are in a vulnerable position will be identified and offered support from a specialist team to help them settle their debts.
Settling debts
Only those who have received this face-to-face visit, have not been identified as vulnerable, have sufficient money in the bank and have still refused to settle their debts will be considered for debt recovery through DRD.
A minimum of £5,000 will always be left in the debtor’s accounts, so that money remains available to pay wages, mortgages or essential business or household expenses.
There is a clear process for debtors to object or appeal.