One-off chance for farmers to slash tax bill

Farmers and food processors that hold large stocks at the end of the financial year could slash their tax liability this year, says rural accountant Old Mill.

HM Revenue & Customs has changed its stance over the treatment of depreciation within closing stock valuations, following a pair of court cases involving Mars and William Grant & Sons Distillers.

Businesses have always been required to include depreciation within a closing stock valuation, to reflect accurately its cost of production. But there were no tax benefits in doing so, says rural tax specialist Catherine Vickery.

“Most farmers and food businesses will be aware that lowering stock values reduces profits, and therefore cuts tax liabilities. Many have a significant amount of equipment, which is depreciating each year, and carry considerable stock levels in the form of commodities or livestock.

“Businesses can now offset a percentage of this depreciation against closing stock values as part of their tax calculation, which can have a massive influence on profitability, particularly in the first year that the adjustment is made.”

For example, a typical arable farm carrying over a quarter of the year’s grain can now offset 25% of its depreciation against the value of those stocks as part of its cost of production. That could cut the value of the stock by, say £25,000, which, at a marginal tax rate of 30%, would equate to a tax reduction of about £7500, says Mike Butler, head of rural services.

“Businesses that carry larger stocks will be able to claim an even greater depreciation element. Some will be able to save vast amounts of tax – big farmhouse cheese producers, for example, could be looking at adjustments measuring in £100,000s.”

All businesses should consider their stock valuation and depreciation calculation, with the help of their advisers, he adds.

“HMRC is actively encouraging people to deal with this matter in the current financial year – those who have already finalised their position should look at it again with a view to obtaining a tax refund.

“This is a superb opportunity for anyone who relies on equipment as part of their business and carries stock or crops over at the end of their accounting year to slash their tax liability. It would be madness not to do so.”

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