Switch tax year to aid savings
TAX savings could be made for many arable businesses by moving their tax year to 31 March next year, according to accountants Grant Thornton.
When profits are falling it is generally better to move to a date later in the tax year, explains the companys senior tax manager, Carlton Collister. Because 1997 was a higher profit year for many arable farmers, the overlap profit is relatively high compared with this year. So by changing the year end to 31 March, although the period in which your profit is assessed is lengthened, there is an overall reduction in taxable income.
Overlap relief arose on the change to the new current year basis in 1997/98 and relates to profits earned before the start date of the new system on 6 April 1997. A September year-end represents the profits from 1 October 1996 to 5 April 1997. The relief is calculated before capital allowances and given when a partner leaves the business.
It can also be claimed on a change of date of the accounts year-end close. A 500-acre arable farm which might be making profits of say £60,000 in 1997 would expect to make less profit in 1998 because of falling prices – say £40,000. If the year-end were moved to March 99 then the same business might have a profit of £60,000 over 18 months, assuming profits are accrued at the same rate. But profits are actually reduced by £10,000 in the March year end situation. So a 20% taxpayer would make a saving of £2,000 or a 40% taxpayer a saving of £4,000.
Factors favouring 31 March tax year
• there is less profit overlap when a new partner joins
• there is less bunching of liabilities for partners when ceasing or leaving the partnership
• if profits are reducing, tax payments should be minimised
• payment of tax is deferred while profts are rising
• the taxable profits will be known earlier so that a decision can be made on whether to reduce the 31 January payment on account
• there will be more available time to complete the accounts
• FARM incomes have been halved for the second year in a row across the industry according to NFU calculations based on figures released by MAFF earlier this month.
It confirms that the current farming recession is the worst experienced since the 1930s.
The NFUs farm income calculation takes into account the cost of family labour which is why there is a discrepency between the NFUs figure of 50% compared with MAFFs 35% fall in income since 1997.
Significant cuts in farmgate prices, the strength of the pound and market oversupply all contributed to the grim statistics (see graph). In January MAFF will shed more light on how the different farming sectors performed.
• THE land market is reflecting the dramatic fall in farm profitability, according to FPDSavills. Over two-thirds of farmland sold this year has been by working farmers – nearly half have done so in order to retire but those selling due to debt has risen to 19% from 10% three years ago.
• THE Russian harvest was the lowest for several years. Carryover stocks are supplementing some of the shortage, but shipments of 1.5m tonnes of wheat from the United States are being finalised and a 1.5m tonnes of grain from the EC being considered.
• UK POTATO prices at the end of last month were £140/t – nearly double that of last year. Wet weather has delayed harvesting across the UK and Europe, with Holland being hardest hit.
• OILSEED rape growers could face a 50% reduction in area aid next year because of overplanting in the past two years and the cumulative effect of penalty rules under the Blair House agreement.
• UK farmers and traders will be given the option to receive aid payments in euros from autumn 2000.
• CARGILL, the worlds largest farm commodity trader, has taken over the second largest grain operator worldwide – Continental.
• THE NFU is encouraging growers to join forces and market their produce more effectively to build a business advantage. The initiative was kicked off at the Smithfield Show with a seminar demonstrating the benefits of growers getting together to market their produce. Focus groups will be taken around the country hosted by the NFU to discuss individual farming sectors and farm assurance.
HOW much can you afford to cut back on herbicides without affecting the bottom line? Its a question that Cyanamid put to business advisors Grant Thornton who conducted a survey on 33,000ha of arable land. These were their findings:
• Sprays account for 47% of variable costs for winter wheat. Herbicides make up 38% of that figure.
• Average herbicide spend is £43.75/ha to maintain costs before profit figure of £173/ha. This is based on wheat at £79/t and an average yield of £8t/ha.
• But the top 25% of producers who have a lower fixed cost structure can afford to spend more – £55.50/ha on weed control and still retain a profit margin of £173/ha.
• If growers increase their spending on herbicides and other variable costs to levels currently operated by the top 25%, and not alter their fixed costs to suit, then profits are likely to fall to £106/ha.
SMALL businesses will welcome new legislation introduced in November to crackdown on late payers. Those employing 50 or fewer full-time employers will be able to claim interest from large businesses if they do not pay on time. The late payment act sets a default period of 30 days in the absence of an agreed credit period.
"Most farming businesses are usually at a disadvantage when it comes to collecting debts," explains Grant Thorntons senior partner Jeremy Lewis. "They do not have professional credit controllers, and in the past have lacked the power to challenge larger organisations over payment of invoices."
"Many farmers will be reluctant to enforce this act because it could jeopardise business relationships, so it falls to larger businesses to set an example. With tough times ahead, late payments can all too easily become bad debts," he adds.