HOW TO CUT TAX LIABILITY IN VIEW
OF COHORT CULL
The BSE cohort cull will have tax implications for producers.
Emma Penny asks one tax specialist how to reduce your liability
THE cohort cull is likely to provide farmers and their tax advisers with yet another conundrum this spring, particularly as the end of the transitional period to self-assessment draws to a close.
And for producers whose cattle are on the herd basis there could be a large difference between the herd basis value of the cattle and cull compensation payments, leading to a large tax bill.
According to Carlton Collister, tax manager with accountant Grant Thornton, there are three areas where producers have scope to reduce tax liability on cull compensation. Changing your tax year end, choosing to dispose of a substantial part – more than 20% – of your herd, and changing the partnership or business should all be considered, he says.
"Up until the Mar 31 we are in a transitional period during which tax moves to a current year basis, and this can have an influence on what producers choose to do," advises Mr Collister.
During the transitional period the tax liability for the 1996 and 1997 tax years is combined and averaged. This effectively means that taxation on any extra profit during the current tax year is reduced.
For producers forced to dispose of cattle before the end of the tax year, and who face tax on that disposal, a change in year end may help reduce liability, says Mr Collister.
"During the transitional period, the Inland Revenue is willing to allow people to change their year end to any date nearer Mar 31. Where, for instance, September is the current year end, it may be possible to reduce tax liability from cull cattle compensation by moving your year end closer to Mar 31."
Think before charge
However, he points out that this may not be an ideal solution. In some cases – particularly where the business is predominantly arable – an end of September year end may be best. "Think carefully before you change your year end. Although changing it now may give gains, it could also reduce flexibility in the years to come," he warns.
Culls being moved off-farm after Apr 5 will be treated under the current years tax rules, which means there will be no scope to include profits in the transitional period.
However, for cattle on the herd basis for tax purposes, disposals can be counted from the time the first culls are moved off farm to that date the next year rather than going by tax year.
That means cattle disposed of in February – perhaps 10% of the herd — can be part of a substantial reduction if a further 11% or more of the herd is disposed of after the end of the tax year.
And according to Mr Collister, producers who face losing under 20% of their herd in the cull – say 18% – and who have no plans to replace those animals could opt to increase the number of animals disposed of to more than 20% of the herd, reducing tax liability.
"If less than 20% of the herd is disposed of, the profit on the difference between compensation rate and the historic cost of replacement is taxable.
"However, where more than 20% of the herd is disposed of – for any reason – and is not replaced the profit is not taxable."
But when those animals are replaced within five years of their disposal, then tax on those animals replaced is payable in the year of replacement, warns Mr Collister.
That liability can be eradicated in some cases by a change in business, he says. "If you opt for a substantial cull, but wish to build up the herd again without paying tax on any profit it may be an idea to consider a change in the business or partnership."
According to Mr Collister, a change in the business or partnership will abolish tax liability from a substantial disposal.
"There are many implications of changes in the business or partnership so producers should consider the benefits and disadvantages of the option. But where, for instance, a son or daughter can be brought into the partnership, tax liability on cull profits will be abolished because that business has changed. It will also allow a new herd basis election."
Most producers will currently be on a herd basis election, he says. But for those who are not, taxation on any profits from compulsory cohort cull compensation can be spread over three years. And producers not on the herd basis, but who face a substantial reduction in the herd through the cull ,can elect for the herd basis – again, if the culled animals are not replaced within five years then there is no tax liability on the profits. *
There could be a large difference between the herd basis of cattle and cull compensation payments. Inset: Carlton Collister… he believes there is scope for producers to reduce the tax liability of cull compensation.
Not on herd basis, substantial cull
Value at 31.12.95 £
100 cows @ £600 60,000
Compensation for cull
30 cows @ £800 24,000
Related cost 18,000
PROFIT – can be spread over three years 6,000
NB If disposal is within transitional period, then only half the profit is taxable in 1996/97.
OR, if you do not anticipate replacement, then consider electing for herd basis, allowable when a substantial proportion of the herd – over 20% – is culled. Profit under herd basis when not replacing animals is not taxable.
Herd basis, loss not substantial, culled animals replaced
Compensation for cull £
10 cows @ £800 8,000
Cost of replacement – same quality
10 cows @ £700 7,000
TAXABLE PROFIT 1,000
On herd basis, profit is taxable in the year the animal is replaced
Therefore, if five cows replaced year ending 31 March 1997, taxable profit is £500, and if the remaining five cows are replaced year ending Mar 31 1998 then taxable profit is £500.
Herd basis, loss not substantial, culled animals not replaced
Disposal of less than 20% of herd – profit taxable
– loss allowable
Herd of 100 cows built up over many years, valued at
100 cows @ £400£40,000
Compensation for cull of 10 cows @ £800£8,000
Less related cost (10 cows @ £400)(£4,000)
Cost of 90 cows @ £400 carried forward£36,000
TAX LIABILITY TIPS
• Where cows disposed of before Mar 31, could change year end so that profits are averaged across both 1996 and 1997 tax years. Should reduce taxable profit.
• Could opt for a substantial reduction where there are no plans to replace those cattle within the next five years. Profit is not taxable.
• Where substantial disposal – more than 20% – and want to replace those cattle within next five years could change business or partnership. Tax liability on profits is frozen.