Farm finance: Carlton’s tax clinic

I think I am due a tax repayment

 Filing tax returns as early as possible can ensure that tax repayments are made quickly and filing your tax return electronically (necessary for tax returns submitted after 31 October) should ensure that repayments are made within a couple of weeks.

If the repayment is not received quickly, call HM Revenue & Customs to ensure that the return has been filed correctly, as HMRC is still experiencing some problems with its new electronic filing system.

My income is falling. How can I reduce my tax bill?

 Project your business profitability for the current tax year to 5 April 2009, to consider whether you can apply to reduce the tax payments on account for 2008/09 due on 31 January and 31 July 2009.

You need to consider your overall income for the tax year when deciding whether to reduce the tax payments on account, including rental income (which may vary owing to repair expenditure and vacant periods) and savings income.

Claims to reduce the payments on account for 2008/09 can either be made with your tax return or subsequently as a “stand alone” claim. But be aware that interest will be charged from the original due date if the tax showing as due once your 2008/09 tax return is submitted proves to be greater than the payments on account.

How do I maximise tax relief on my borrowings?

 Farmers can usually structure borrowings so that they relate to the farming or a rental business, so tax relief should be available on loan interest. Review how your borrowings are structured to ensure that relief is available for example, by avoiding personal overdrafts.

What are the new rules on capital allowances?

 Some capital expenditure can benefit from immediate tax relief for 100% of the cost, including the Annual Investment Allowance (replacing first-year allowances) for the first £50,000 of qualifying expenditure on plant and machinery (excluding cars).

In addition to the Annual Investment Allowance (PDF), enhanced 100% capital allowances are also available on energy-saving and water-saving equipment (plus claim payable credits for loss making companies). See http://www.eca.gov.uk/ for more.

What happens if I defer expenditure?

 Consider the timing of expenditure to maximise income tax relief. It is usually beneficial for farmers to incur “discretionary” expenditure, such as building repairs, before their business year-end, to obtain tax relief a year earlier. But this may not always be the case. For example, with capital allowances falling to 20% on capital expenditure of more than the £50,000 Annual Investment Allowance, it may be beneficial to defer capital expenditure if the AIA will not be used in full in the subsequent year.

Delaying payment of tax will cost more in the long run as interest, penalties and surcharges will be levied. But if you will have trouble paying your tax bill, speak to HMRC, as you may be able to negotiate paying on an instalment basis.

What tax-efficient savings vehicles are there?

 An Individual Savings Account (ISA) is a tax-efficient investment for savings.

The maximum permitted contribution in 2008/09 is £7200. If ISAs already form a key element of your savings and tax mitigation strategy, and since unused allowances cannot be carried forward, it is important to use your full allowance before the end of the tax year. Savings within an ISA are not subject to income tax other than a 10% tax that is taken at source on the dividends distributed by UK companies. All growth in the value of the investments is free of any capital gains tax liability.

National Savings Certificates also offer tax-free saving. You can invest up to £15,000 in each issue without it affecting any other tax-free investments you have and, with interest rates fixed for the length of your chosen term, you will know how much interest you will earn each year. Income is totally free of income tax and there is no capital gains tax liability on redemption.

Should I review my business structure?

 As farmers’ businesses develop and tax legislation changes, the most appropriate structure may change. You should speak to your professional adviser about changes in business structures and planned future transactions to ensure that you take advantage of new reliefs and avoid potential pitfalls.

Capital gains tax rules have changed from 6 April 2008 with a flat rate of tax and a new entrepreneurs’ relief, which has significantly different rules. HMRC’s evolving approach to inheritance tax reliefs, where there have been several reinterpretations of the availability of business property relief in the current year, may also necessitate changes to your business to protect your estate from the taxman.