Tax rebate may be possible with five-year averaging

Farmers may be able to use five-year tax averaging to secure a tax rebate this year.

Mike Butler of rural accountants Old Mill said five-year averaging, introduced for the current year, enables farmers to spread their income and expenditure over five years, to iron out the peaks and troughs caused by market volatility.

“Cash is very tight on a lot of farms right now, but if you go back five years there is likely to have been a lot of tax paid,” he said.

See also: Five-year tax averaging could free up investment cash

“The critical point for all farmers who operate as sole traders and partnerships is that 2016/17 is the first year in which they can use this tool to potentially secure a tax refund.”

Mr Butler said people who expect to make very little profit – or a loss – this year can spread that back to offset against profits in previous years.

“The larger the financial downturn, the greater the benefit of averaging.”

Where farmers have previously enjoyed particularly large profits – especially those taxed at the higher rate – it may be worth looking at the timing of expenditure and sales in the current tax year to further reduce taxable profits or maximise losses, he added.

“While it’s never worth making business decisions simply to reduce tax, if you are planning investment in the farm you might as well do it in the most timely and tax-efficient manner.”

Farmers can still choose to average over two years, and in future will be able to continue to use five- or two-year averaging in each financial year to reduce market volatility.

The average has to be calculated for each partner in the business, so what applies to one person may not apply to another.

“It can be quite a complicated process, but the advantages are considerable,” said Mr Butler.

“The key is to act before the March year-end: getting a tax rebate at this critical time will be extremely helpful from a cashflow perspective, so don’t miss this valuable opportunity.”

Transition Live

Find out more and get tickets

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.

Find out more
See more