Want to minimise tax, maximise relief and improve your cash flow – then get your books up to date, says Steven Rudd, of accountant Larking Gowen.
Gone are the days of writing the books up after the year end – computers provide access to almost real-time information and this gives farmers a great opportunity to plan ahead.
By getting the books in before the year end, you can produce ‘10 month accounts’, allowing a discussion about crop and livestock movements expected in the run up to the year end. Then some accurate information can be produced to help manage tax liabilities and the cash flow impact of tax payments over the next 12 to 18 months.
Practical ways to reduce taxable income:
- Considering whether it is feasible, sensible and tax efficient to spend on plant and machinery. The Annual Investment Allowance (AIA) is currently generous with qualifying expenditure attracting 100% relief in the year it is incurred. The current AIA levels run through to 31 December 2015 at £500,000 for each accounting year. You should be planning ahead any capital expenditure in particular for the next 12 months or so. Just remember that where it is acquired on hire purchase, the asset needs to be in use at the year end for all of the expenditure to qualify.
- Accelerating tax allowable expenditure. If there are repairs, farmyard works or work required on farm tracks, identifying the likely profits will help decide whether this should be accelerated to before the year end. Depending upon your year end there may be some practical difficulties, but genuine repairs will be entitled to 100% relief in the year incurred.
- Pension contributions – as long as there is taxable earned income to support the contributions, individuals can pay up to £40,000 gross (£32,000 net) a year (or even more if there is unused relief from previous years) which may entitle you to higher rate tax relief through the self-assessment return.
- Longer term, the proposed changes to pensions in 2015 mean that, as well as providing a future income stream away from the farm to aid succession, there will be the opportunity to create an Inheritance Tax (IHT) exempt fund to move down to the next generation.
- Timing of crop/livestock sales can be important. Where crops or livestock are unsold at the year-end they will be shown in the accounts at cost of production (or deemed cost if relying on accounting guidance known as BEN 19) rather than market value. There may therefore be an element of unrealised profit included in crops and livestock in the valuation, so the timing of the sale of crops into the next accounting period will defer the point at which that profit is recognised.
Of course, decisions should always be taken on a commercial basis with the tax tail never being allowed to wag the business dog.
Early accounts – tax planning opportunities
- Whether to pay into pensions and the level of contributions.
- Accelerate allowable expenditure such as repairs.
- Are further plant and machinery acquisitions needed?
- Delay selling crops/livestock until the next year to defer profit.
- Reduction in payments on account
- Outside the business accounts, other issues such as capital gains tax annual allowances and ISA allowances can be discussed too.
Another advantage of getting an accounts projection done early is that it allows you to consider whether to use farmers’ averaging. This useful tool is available on fluctuating farm profits only, for example, excluding cottage rents and other non-farming income) and means that, where the difference between taxable profits in two consecutive years is more than 30%, the profits can be averaged between the two years. This helps to smooth out fluctuations.
Even where averaging doesn’t reduce the overall tax and national insurance cost, it can reduce future payments on account, and aid cashflow.
Reducing payments on account
Once you have a good idea as to where the profits stand, other opportunities such as reducing payments on account can be considered, where profits have fallen or where there is an impact from farmers’ averaging.
HMRC allows you to reduce payments on account where you have a reasonable expectation of a reduction in taxable income. But beware – there are penalties for false over-reductions and interest will apply if it turns out that you have underpaid tax. Having good quality interim accounts and projections will help to support a claim to reduce payments on account.
Claims can be made either through HMRC online or by using form SA303.
Keeping things up to date also means that final accounts can be produced more quickly.
Tax and cash flow planning – what does the next 24 months have in store?
Off the back of a good couple of years, many arable farmers have invested in plant and machinery – particularly when the capital allowances available have been so good.
However, the outlook for lower prices in 2015 means that we are probably facing reduced profitability next year, but a higher tax liability legacy from the better performance seen over the past couple of years.
Reduced profitability and cashflow may also mean a reluctance to spend on plant and machinery, and with low capital allowance tax pools brought forward, after adding back depreciation, the taxable profits could be higher than the accounting profit.
This may come as a shock to some, with reduced profitability leading to pinch points on cash flow both for business expenses and for paying tax bills.
This applies equally to some businesses in other sectors and is another good reason to review the level of likely taxable profits and to understand the effect of future tax payments on cashflow.