Arable farms and those that have made large investment in machinery could make significant savings in their tax bills this year because of a change in the way depreciation is accounted for, chartered accountant, Chavereys has advised.
It follows a joint case taken to the House of Lords by William Grant & Sons distillers and Mars UK last year, where it was decided that the depreciation element in the cost of production and stocks in store in a year end valuation could be treated as an allowable tax expense.
Soon after the decision, Chavereys contacted HMRC to discuss the implications of this and in July got final agreement that it should be applied to farm businesses. “Since then we have been working through how this should be applied,” said the firm’s Nick Holmes. “For arable businesses in particular, this is a big deal.”
The change affects all sole traders and partnerships with an accounting year end between 30 April 2007 and 31 March 2008, a year in which many made significant investment in machinery and equipment on the back of higher commodity prices. The dates for companies are slightly different but they can still benefit from the change.
“Depreciation charged in the accounts is not usually a tax allowable expense because businesses get capital allowances. However, because of the way valuations have been treated to date, the element of depreciation in valuations is effectively disallowed twice and this is what the case was challenging.”
Henry Mullens of Chavereys’
One typical example was an arable farmer with a 243ha (600acre) all combinable crop farm and a 31 March 2008 year end. The grower had a third of the 2007 crop still in store at the year end, with depreciation carried forward in harvested and growing crops worth £14,345.
“This case means that he will see a reduction in his tax bill on 31 January 2009 at the basic rate plus national insurance of £6,455,” said Mr Mullens. “An element of this is the reduction in the payment on account which he is also due to make next January. If he was a higher rate tax payer the saving would be £8,822.
“Most of our clients are larger businesses than this, so it makes a much bigger difference, but this is likely to be significant for all arable farmers, everybody should be doing the calculation to check the effect on their taxable income.”
The largest adjustment Mr Mullens had made so far was for an arable and potato business which achieved a £65,000 reduction in its tax bill. He reminded taxpayers that the effect of this change would have implications for tax credits too, in that it reduced taxable income and so gave rise to more and/ or larger tax credit claims.
“As a result of this case, all businesses should be making an adjustment, and most will get a cash flow saving from it, although the advantage will be limited in smaller businesses,” commented NFU head of tax, Michael Parker.
“In the past, all depreciation was added back onto the taxable profit but now the depreciation element in the closing stock figure should not be added back.”
Tax calculations need to be adjusted to reduce the tax payable on January 31, 2009.