DAERA Management Notes: Finance

As we are now in early 2020, it’s a good time to think about how the farm business is going to look at end of the 2019/20 tax year. There is still plenty of time to plan how to manage your tax liabilities for the current year and plan for the year ahead. If you haven’t already done so, I would recommend you make an appointment with your accountant or tax adviser.

It is important to consider options for reducing your tax liabilities and using any money available wisely to benefit your business. If you are reading this thinking you will be faced with a significant tax bill this year, it is a good sign; tax means you have made a profit. But it is important you pay the correct amount of tax you are liable for. I have outlined a few options to help plan so you do not pay too much or too little tax. These will benefit your business, other family members or charitable organisations.

Paying off debt

Over the last few years many farm businesses had to extend overdrafts and merchant credit to manage cashflow. Paying off debt when you can is important. We don’t know what the markets or weather will throw at us in the years ahead so it is better to repay debt in the better times to reduce the financial burden in hard times. Speak to your bank manager and work out a plan to pay off your debt when you can.

Capital investment

The Annual Investment Allowance has been increased from £200,000 on 1 January 2019 to £1 million until 31 December 2020. This makes investing in plant or machinery an attractive option for reducing your tax liability. It is good practice to have a machinery replacement policy for your business to allow you to plan ahead and structure your capital spending. Any proposed purchases require careful consideration; is it needed and is it part of a plan? It does not make financial sense to buy equipment for the sole purpose of reducing your tax bill! In most cases, repayments will be spread over several years and cashflow must be available to cover those costs going forward.

Pensions

The Government encourages us to save for our retirement by providing tax relief on pension contributions. For personal pensions you pay income tax on your earnings before you make a contribution to the pension. However, your pension provider will claim back, at the basic tax rate of 20%, your contributions from the Government, adding it to your pension. If you are paying a higher rate of tax, you can claim the tax back either through your tax return or by contacting HMRC. Your accountant or financial adviser can also advise you on options for setting up trusts for your children or grandchildren.

Charitable giving

Making a donation to a registered charity is perhaps something you already do. If you are a sole trader or a partnership you can take advantage of the tax reliefs on gifts of money to charities and can claim them on your Self-Assessment tax return.

Paying tax

Remember that you pay only a proportion of your profit in tax and the rest can be saved or invested for when you really need it. The deadline for paying tax is 31 January for tax on profits made in the previous tax year. For example tax due on 31 January 2020 is tax owed on profits made during the 2018/19 tax year. Your tax demand may also include a ‘payment on account’ which is the first of two estimated part payments for the current tax year’s liability. The second ‘payment on account’ is due on 31st July each year. It is important to remember that tax owed on a year when profits are good is often due during a year when profits are lower and so it is important to budget for your tax payments.

Farmers whose business is unincorporated have the option to average their profits for tax purposes over any two or five consecutive years with the averaged figure being used to work out their income tax liability. 

Farming incomes can be significantly volatile between one year and the next. Averaging irons out these peaks and troughs. 

Averaging profits over the relevant number of years and treating the average profit as the taxable profit means you can offset good profits in one year against smaller profits or losses in another. This reduces the risk of a business being hit by a high tax bill in a bad year when cash flow might be tight and in some cases they can even generate tax refunds.