Tax issues: Benefit from good financial housekeeping

Are you claiming tax credits?

Many people are entitled to working tax credit or child tax credit, but are reluctant to claim. These payments, designed to bolster low incomes, can be worth more than £9000 a year to a family with three school age children. Even couples with an income up to £58,000 can get something back in this way.

Anyone with school age children should check their entitlement, particularly if they are carrying out investment in plant and machinery, says Rob Hitch of chartered accountant Dodd & Co, Carlisle.

“Where the first-year allowance is being used to invest in the business this reduces taxable income, bringing many families into the qualifying income range for tax credits,” he says.

Broadly, tax credits are based on the previous year’s income and although there has been publicity about overpayments leading to repayments having to be made, the rules have been relaxed to make this less likely. Now, income has to increase by more than £25,000 for any repayment to be due.

You can put in a protective claim before your accounts are drawn up just in case income is low enough for you to qualify, as a claim cannot be made retrospectively, says Mr Hitch. “If it turns out your income was low enough to qualify, then underpayments will be made to you as a lump sum. Those without children, on low incomes may qualify for working tax credits,” he says.

Plan ahead to save tax

Rushed decisions often cost more than those made with plenty of time. So, discuss any planned investment with your accountant in good time.

The rules on buildings, first-year allowances and writing down allowances have changed dramatically recently. Different classes of investment (plant, integral fixtures and fittings) qualify for different rates of relief. A design change at an early stage can significantly enhance the tax position of a building or installation.

On planned investments, once you reach your financial year end, it is too late and you may have lost a tax planning opportunity, according to Mr Hitch. “Ten months into your financial year, draw up draft accounts and discuss any tax planning or investment with your accountant to decide the best schedule.

“It might be a question of when to replace assets to get the most favourable tax result, or whether to make pension contributions to reduce the tax bill. In any case it will help plan cash flow to ensure funds are available to pay any tax due.”

Living expenses

Do you know how much it costs you to live for a year? Do you put these expenses into your budget? Few farmers know the costs involved or budget for living costs, but it is a good exercise to keep track of personal expenditure, says Mr Hitch.

“It’s easy to draw from the business, especially when there is an overdraft, but it is wise to think how much you need to live on. Farmers tend to draw what is needed, but sometimes when they take account of their total private expenditure it can be a shock.

“You may be pleased to know you’ve made a £12,000 profit, but if you’re drawing £20,000 for private expenses, then the business is going backwards,” he says.

HMRC is becoming interested in the grey area between what is necessary for business and what is personal expenditure in terms of reclaiming VAT. A good example is in the farmhouse, where it could be argued any repair or replacement benefits the business in some way. But you may have to compromise, be pragmatic and do a deal at a lower figure, warns Mr Hitch.

Are your records, systems and books in good shape?

Unless you are organised, it could be costing you more time and money than necessary. If you are still handing over a box of receipts every year and letting the accountant sort it you will be paying more fees than if you have a good set of records and an orderly cash book.

“Talk to your accountant, find out if the way you are presenting your books is the best way for them to handle the information quickly and easily. If you really don’t have the time to keep these records, consider subcontracting to a book keeper or family member with good computer skills to input data. The more accurate your records, the better you can plan your expenditure and possibly save tax as well as accountant’s fees,” says Mr Hitch.

“In the same way, if payroll is taking up time, a bureau may be a better solution and can be cost-effective, as long as you are able to provide the records and information they need in time to do the job.”

Farmers are often slow to chase payments for work they have done for example, contracting work off the farm, so quick invoicing and chasing debtors are good habits to get into, says Kite Consulting’s Ainsley Baker.

Making changes to the business?

Where you are making a structural change such as bringing in a new partner, consider whether this brings opportunities in other areas, such as tax planning. It may offer the chance to crystallise a gain or offset a loss by moving assets around, transferring or disposing of them.

Taking the time to plan both medium and long-term changes to the business means less stress for all concerned, better decision making and often lower costs, says Mr Baker.

Manage your bank account

Do you write cheques knowing the facility is there to meet them, or do you wing it and hope they won’t take you over the limit? If it’s the latter, you’re likely to be paying more than necessary in fees and other banking costs.

“One of the worrying things about many dairy businesses is that they will know how much their last milk cheque was, but they have no idea what their current liabilities are – how much they owe for feed, electric, fuel and so on. It’s worth keeping a running tally on this so you are in a better position to make decisions,” says Mr Hitch.

Consider internet banking to allow you to easily keep track of payments made and sums received.

Budgets and cash flows

Most dairy businesses need a detailed budget and a cash flow forecast, says Dick Mason of Lloyds TSB Agriculture.

“Too many of these are still too optimistic on costs, in particular for repairs, personal expenditure and capital expenditure,” he says.

“They also often don’t have any sensitivity in them. For example, what happens to the budget if milk prices drop 3p/litre within three months, as we have just seen? Personally I’m optimistic on milk prices long term, but this volatility is here forever.

“And just as milk price changes should be built into budgets, so should interest rate changes. A proposition might work with base rates at 1%, but does it work if they are 5%?” adds Mr Mason.

It is also important to remember tax payments in cash flows. “People are frequently caught out by this because you will often find you are paying tax on a profitable year in a year which is not so profitable.”

As more herds have moved to block calving, cash flow planning has become more of an issue, especially in the run up to tax payments due in January and July, says Mr Baker.

It means spring-calving herds struggle to find the January payment, as milk income is low at that point and, similarly, those with autumn-calving herds can have trouble meeting the July payment.

Draw up a balance sheet each year with realistic market values to assess whether your business is growing or not, says Mr Mason. “So often balance sheets are produced purely for the taxman and are of limited use for management purposes.”

Risk management and banking

Review borrowings and consider fixed interest rates to reduce the risk in the business, says Mr Mason.

“If you have significant hardcore borrowing in your overdraft or variable rate loans, consider putting some of this on to a fixed rate. Today’s low rates may not be about for too long.”

Forward buying of inputs and selling of outputs can also reduce risk and make budgeting more reliable.

When buying long-term assets such as land or property, farmers often want to pay off the borrowing as quickly as possible, but this often causes stress and is a burden for the business, says Mr Baker.

“It’s usually better to link the term of the loan more closely with the life of the asset. For example, with land purchase it is usually better to take a 25-year loan than a 10-year loan, but ensure the terms allow you to make one-off capital repayments without penalty. You could also tie the length of the loan to your retirement date on similar terms,” adds Mr Baker.