Tax planning and cash flow on the farm

A limited company pays corporation tax nine months after the end of its accounting reference date. Timely tax planning can assist in cash flow management.

Relevant tax planning opportunities for sole traders and partners include: As profits fluctuate, it is possible to make a claim for ‘averaging’, averaging is not available to limited companies or to those carrying on the trades of agricultural contracting or haulage.

With effect from and including the 2016/17 tax year, farmers have the choice to average profits either over two years or five years, whichever is the more advantageous. In order to be eligible for averaging, the farmers must meet a volatility test. An averaging claim must be submitted to HMRC no later than twenty-two months after the end of the second year of assessment.

The normal basis of livestock valuation is the lower of cost or net realizable value. If the value of livestock increases from the beginning to the end of an accounting period, tax is payable on the increase. However, a farmer who trades as a sole trader, partnership or limited company and has a production herd of cows, sows, breeding ewes or fish may elect in writing for the herd basis. The main benefit of the herd basis is that annual increases in the value of the production herd are not taxable. In addition, the final disposal of the herd is tax free if not replaced within five years. There are additional book-keeping requirements but an election for herd basis can be very beneficial in managing tax liability.

Where a farmer’s son or daughter is employed on the farm, and is attending a full time course in agriculture, payments up to £15,480 to the employee for the current academic year may be paid free of tax and National Insurance. In addition, the payment will constitute an allowable deduction in arriving at the farmer’s tax liability.

This is an attractive incentive to bring new skills into the farming business, as well as the cost being tax allowable, if the conditions are met.

Where the farm business makes a loss, this loss can be dealt with in two ways: the loss can be carried forward without time limit and setoff against further farming profits or the loss can be transferred against other taxable income, thereby resulting in a tax refund.

In order to successfully obtain a tax refund, the farmer must prove that the farm business is run on a commercial basis and is not merely a hobby. In addition, there are restrictions on the amount of the loss that may be transferred.

If the farmer is unable to pay the tax liability due on January 31, it is possible to agree a ‘time to pay’ arrangement with HMRC, provided Tax Returns have been filed.

The request must be done before the due date to pay the tax, and, if the arrangement is adhered to, no penalty is charged but interest is payable.

The above are examples of tax planning opportunities which will assist in managing tax liability. In order to take advantage of these opportunities, it is necessary to have year to date figures available including COVID monies received and to maintain regular contact with the farmer’s accountant.

For further information, contact (028) 8224 1515.