Examine your business to lower your tax bill

With the end of the tax year looming, farmers should be examining ways to minimise their tax bill. Olivia Cooper finds out how

Paying taxes may be an inevitable part of life – but that doesn’t mean growers need to pay more than absolutely necessary. As the end of the financial year approaches on 5 April, they have a valuable time period in which to slash their tax burden.

The first step, according to Andrew Vickery, associate director at rural accountant Old Mill, is to ascertain what levels of profit you are likely to make. “Very few people actually sit down before the end of the financial year and work out if they’ve made any money. But it is very important and often easy to do – and once you’ve done it you can then take action to mitigate the amount of tax you need to pay.”

One of the common options employed is to bring forward capital or repair expenditure to offset against profits. “While this may sound simple, accelerating such spending by a couple of weeks could bring the corresponding tax relief forward by a full 12 months,” says Mr Vickery.

Top tips

• Bring forward capital or repair expenditure

• Delay sales

• Consider incorporating to reduce tax

• Make the most of existing capital reliefs 

It is particularly important to consider accelarating capital expenditure, given forthcoming changes to the Annual Investment Allowance. “Currently, businesses get 100% tax relief on qualifying purchases of plant and machinery, up to £100,000. Any expenditure above that can be written down at 20% a year.” The same applies for 2011/12, but from April 2012 the 100% relief is expected to only apply up to £25,000, with the excess qualifying for an 18% allowance per year.

“People, therefore, need to think about what plant and machinery they need to buy over the next three to five years, and whether they can bring those purchases forward to qualify for the higher rate allowances.” In addition, any new buildings such as grain stores should also be considered. “While you can no longer get tax relief on the agricultural building itself, a lot of the internal equipment, including grain panelling, ventilation, electrics, guttering, and so on, will qualify for the Annual Investment Allowance. It is a very worthwhile exercise to pick these costs apart and see what you can get tax relief on.”

Another way to minimise income tax before the year-end is to delay sales. “Corn in store is valued at 75% of its market value – if you physically sell it to move before the year-end you crystallise the additional 25% in value, therefore increasing profits.”

In addition, farmers could pay into a pension to reduce profits and secure additional tax benefits. “If you are a sole trader or partner you will need to pay in before 5 April; if you are part of a limited company, contributions need to be made before the company year-end.”

An increasing number of farm businesses are likely to consider switching to a company structure for the coming tax year, given changes to the tax regime. This year was the first to introduce the higher 50% income tax rate for sole traders and partners, levied on profits above £150,000. In addition, people earning more than £100,000 have seen their personal tax free allowances cut, while from April 2011, National Insurances rates for both the self-employed and businesses employing staff under PAYE will increase by 1%.

“At the same time, corporation tax rates for small companies are being cut from 21% to 20%, making incorporation very attractive for many farming businesses,” says Mr Vickery. “However, doing so does have other implications, particularly on eligibility of some assets for inheritance tax relief, so farmers must take professional advice before making any structural changes to their business.”

The increase in the top rate of capital gains tax, from 18% to 28%, introduced last summer, has placed a weighty burden on farmers seeking to sell or gift assets which have appreciated significantly in value. Those facing a considerable capital gains tax bill should, therefore, make use of the 10% entrepreneurs’ relief on disposals up to £1m.

“While entrepreneurs’ relief only applies when selling or retiring from a business, that does not actually mean you need to sell or retire,” says Mr Vickery. “There are many ways to trigger such an event, including incorporating a business, or bringing a new person into an existing partnership. These are very simple ways to maximise your tax relief on large disposals which would otherwise incur a hefty capital gains tax bill.”

Farmers could also crystallise losses on assets such as commercial property. “If you are seeking to gift such assets to the next generation, now may be a good time to do it, as they may they have a lower value than in recent years. This could reduce your capital gains tax liability, as well as any inheritance tax bill in the future.”

With the government currently reviewing all 1042 types of tax relief available, further changes in the tax structure are highly likely, he warns.

“While this will not be limited to farming, a number of specific farming reliefs, such as agricultural property relief from inheritance tax (IHT), will be under consideration. There is a constant threat against agricultural property relief on farmhouses, and businesses should be very careful in how they structure and use their assets.”

In addition, HM Revenue & Customs (HMRC) is gearing up for a major investigation of small businesses’ bookkeeping. “HMRC is planning to investigate 50,000 small businesses over the next 12 months, so it is vital that your accounts are in order, or you could face fines going back many years.”

Another danger area is the recent explosion in on-farm renewable energy projects. “While many of these sites are in the early stages, farmers must carefully consider the effect of such ventures on the farm’s tax position before reaching any agreement with potential developers.”

Clearly, the regular income offered by large developments is extremely attractive compared to agricultural returns, but farmers who are simply receiving a rent for the use of their land may lose valuable tax reliefs. “It is essential that you take advice at an early stage; certainly before signing any option agreement, to see how important tax reliefs can be preserved.”

Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

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