THE New Year brings with it the looming January 31st deadline, which all businesses and self employed people must meet when it comes to filing their annual tax return.
And, of course, the word ‘must’, which features in the previous sentence, means exactly that!
While all of that is still ahead of us, the closing weeks of 2012 were marked by the Chancellor of the Exchequer’s Autumn Statement. The intervening period has provided an opportunity for accountants and tax planners to more fully assess its implications. We now know, for example, that as part of the government’s wish to reduce administrative burdens on small businesses, a simplified accounting scheme will be introduced from April 2013. This simplification will allow self-employed businesses and those in partnership to calculate profits on the basis of cash with no distinguishing between revenue and capital expenditure. In addition, those businesses trading as a sole trader or partnership will be able to operate a flat rate system for certain expenses.
A temporary increase was also announced by the Chancellor to the Annual Investment Allowance (AIA) from £25,000 to £250,000 for two years from 1 January 2013 for the purchase of eligible plant and machinery. Revenue & Customs has stated that special transitional rules will apply where a farmer’s accounting period straddles the start date, 1 January 2013, or the finish date, 1 January 2015. As these transitional rules are expected to be complicated and apply to the accounting year of the business, not the tax year, careful planning is required in order to avoid losing some or all of the allowance.
Timing of the expenditure and the date on which the machine is first brought into use in the business are critical. The allowance applies to new or second-hand plant and machinery paid for by cash, cheque or hire-purchase and used in the farm business.
However, as farming is so price-dependent and weather-dependent, purchase of plant and machinery is not the only tax planning consideration. At this time of year farmers should extract from their book-keeping system ‘year to date’ figures, enabling an informed prediction to be made of the likely trading profit for the current year. This informed estimate may then be discussed with the accountant to determine the projected taxable profit for the current year.
This process of ensuring that the farm book-keeping system is complete, and up to date, and discussing with the accountant provides an effective framework to ensure that decisions to minimise tax are made in the best interest of the business, mindful of cash flow implications. An up to date and complete book-keeping system will allow the farm family and accountant to focus on issues like repairs, timing of purchasing machinery, the use of family wages, pension contributions and appropriate business structure.
The Chancellor’s Autumn Financial Statement has provided a timely reminder of the necessity of good tax planning in a period of price volatility and uncertainty.