Good management now can ease end-of-year tax bill

Arable profits for the 2009 tax return could be lower than in 2008, but still need careful management to minimise the tax bill, say accountants. Action is needed before the end of the tax year on 5 April.

Pension payments

“Assess how much profit you are making for the tax year ending 5 April 2009. Farmers with a 30 September year end should be close to having, or should already have, their accounts and a tax estimate,” says Iain McVicar of Albert Goodman, Taunton.

For every £6000 invested in a pension fund by a higher rate taxpayer, the government puts in another £4000. “If you do not like the idea of putting your pension fund in stocks and shares it is possible to set up a Self Invested Pension Plan (SIPP) allowing you to invest in commercial property and farmland, or leave the investment as cash.

“The tax benefits are enormous. However, there are costs and it is generally only worthwhile starting a SIPP if you have at least £50,000 to invest,” says Mr McVicar.

Machinery purchases

Bringing forward machinery purchases can help reduce the tax bill. But beware, the new allowance of the first £50,000 at 100% followed by 20% on the reducing balance means the benefits of this have to be carefully calculated, warns Mark Chatterton of Duncan and Toplis, Newark.


Bringing forward machinery purchases or delaying grain sales can both help reduce tax bills

Grain sales

Keeping corn back until after the end of the accounting year in which it was grown can also help to reduce tax. “I think there could still be a decent profit in the 2008 harvest grain stocks carried over into the 2009 tax year,” says Mr Chatterton. Carrying it over will take those sales into a year where the profit on harvest 2009 is likely to be lower.

New partners?

Bringing in a new partner shouldn’t be done purely for tax reasons, but can be backdated by three months, says Mr Chatterton.

“For example, a son, daughter or spouse could be brought into the partnership in December 2008 and get four months of profit share for this year. But it’s an all-or-nothing thing and it’s got to be right for the farm, the business and the family in the long term.”

Consider extending accounting year end

Tax payments can be delayed by extending your accounting year end by six months from 31 March to 30 September. “The reason is that where there is an 18-month accounting period to 30 September we now only need to account for 12 months SFP,” says Mr McVicar.

“With a reduction in business profits expected following lower prices for the 2008 harvest and increased input costs for the 2009 harvest, this could result in a significant tax saving. I have undertaken the calculation on a very profitable 400-acre arable farm and the tax saving is about £16,000.”

Review business structure

Limited companies pay tax at 21% on profits up to £300,000 compared with the higher rate of personal income tax at 41% (40% tax, 1% National Insurance).

Those considering incorporation will probably find the best time to change is just after the start of the next tax year, 6 April 2009, says Mike Butler of accountant Old Mill Rural Services, Yeovil. “Limited companies can write the value of single farm payment entitlements valued and transferred on incorporation off against income, effectively yielding 1.25 to 1.5 times the SFP value received tax free.”

But with the basic rate personal income tax band now extending to £41,500, going limited is not as big a draw as five years ago,” says Mr Chatterton. “Unless you are consistently making profits of £300,000 or more, I would steer away from incorporation.”

Mr McVicar suggests an alternative approach. “It is not normally worthwhile running the whole of a farm business using a limited company. However, I have several limited companies that operate alongside farms, resulting in significant tax savings. For example, an arable business might want to form a contracting company to provide services to the farm or to outside businesses.”

Pass on assets whose value has fallen

With share prices having fallen dramatically, now might be a good time to pass on holdings for IHT purposes and probably crystallise capital losses at the same time, says David Missen of Larking Gowen, Fakenham, Norfolk, who points out that where losses are established on transactions between family members in this way, future loss relief is restricted.

“Alternatively, if you already have capital gains, typically from land sales, do you have unrealised losses on shares to set off against those gains? You will need to crystallise the loss to claim it, but if you don’t want shares to go out of the family permanently, you can sell the shares and another family member can buy a similar holding the next day,” says Mr Missen.

Keep up with tax payments

Mr Butler reminds those who did not pay tax due by 31 January that they must make sure the tax payable for 2007/08 is paid by 28 February 2009 to avoid an additional 5% income tax surcharge.

Mars adjustment?

Check that your accountant has applied the Mars adjustment. This effectively gives many businesses a one-off lower tax charge, following a House of Lords decision last year.

“The average benefit to family farms is £2000-5000,” says Mr Missen. The adjustment should have been done for the 2007/08 tax year, and while you can still make the adjustment, it needs to be done sooner rather than later.”

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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