Relieve cash squeeze with timely farm tax tips

Practical steps can be taken immediately to alleviate the cash flow crisis in many farm businesses, says Gary Markham of Churchgate Accountants

Tax payments due soon

Most businesses will have a tax payment to make at the end of July – this will be a payment on account for the next instalment of tax due on 31 January 2014.

Many arable businesses and some livestock and dairy farms are likely to be able to reduce this payment because of lower profitability in their annual accounts ended in the 2012/13 tax year.

It is important to realise that the annual accounts ended in this tax period could be covering either the 2011 harvest or the 2012 harvest:

  • Year ended 30 April 2012 would cover the 2011 harvest
  • Year ended 31 March 2013 would cover the 2012 harvest

Action – speak to your accountant about reducing the forthcoming tax payment due in July.

Getting stock valuations right

We are still coming across annual stock valuations of grain in store at year-end at deemed cost of production, which is 75% of market value. However, actual cost of production is currently considerably less than this, so there is an opportunity to reduce the value of closing stock in some businesses to an actual cost basis, which will bring the tax bill down.

Action – speak to your valuer and accountant to check whether there is scope to reduce last year’s value of grain in farm stores or in a co-operative store.

Adjust for depreciation

Also on valuations, many farming businesses are not adjusting their annual stocktaking valuations to exclude depreciation normally included in tillage valuations and grain in store.

Depreciation can represent a large proportion of a valuation and the correct approach has resulted in being able to reclaim tens of thousands of tax back for some farmers. The correct method of valuing stock is for the valuer to include depreciation and then for the accountant exclude it for tax purposes.

Action – speak with your accountant – if an adjustment is required it is also possible to readjust a prior year and reclaim overpaid tax.

Annual Investment Allowance

AIA limits have been very volatile over the past few years and this has had a dramatic effect on the adjusted taxable profit of farm accounts. In many instances this has been a greater effect than variations in the harvests.

In the period April to December 2012 only £25,000 was available, whereas in the previous tax year it was £100,000. As from January 2013 £250,000 is available for two years. These allowances are time apportioned, adjusted for the financial year of the business.

Care should be taken to avoid balancing tax charges on disposal proceeds where possible.

Action – make sure you understand the rules, timings and how they apply to your business before speaking to your machinery dealer.

Pensions tax relief

Pension contributions are often used to reduce tax payments. However, they are not very efficient tools in current circumstances. This is because they effectively reduce the working capital of the business unless a Self Invested Personal Pension or Self-Administered Scheme is used to either purchase an asset from the business or to fund a planned capital asset.

For a 40% taxpayer, only 20% relief is available to the individual because the other 20% relief is added to the fund within the scheme.

Action – make sure the person dealing with your pension planning is fully communicating with your accountant. Unfortunately, in most cases this does not happen and opportunities are missed.

Cash advances

Many farming businesses take cash advances from their grain merchants or co-operatives against grain sales commitments. This can be a very efficient method of borrowing working capital. Ideally your bank manager should have full knowledge of this as it helps maintain his/her confidence in your ability to manage your business.

Action – contact your grain merchant or co-op to check what facilities are available and if you take them up, keep the bank informed.

Budget call

All of this strategy to manage cash within the business should be within the overall framework of a farm budget. Do not get a consultant to prepare a cashflow budget for you – learn to use a spreadsheet and prepare it yourself and then talk with your consultant.

Action – make sure you can use a spreadsheet – if you can’t, go to evening classes. Make sure you get a second opinion on the cash flow from somebody who sees many farming businesses and who therefore is able to share experiences with you. Then fully discuss with your bank manager – they do not like surprises.

More on this topic

Cashflow advice to help weather the storm

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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