Farmers will shortly be meeting with their accountants to discuss the annual accounts of their farm business for 2016-2017.
This is an important discussion as the annual accounts are required for many purposes: firstly, and most importantly, to inform the farm family of the trading results and tax liability but, also, possibly as a basis to determine eligibility for Tax Credits and assistance with further/higher education.
In addition, the annual accounts form part of the annual review with the bank and are a key ingredient in maintaining a positive business relationship between the farm business and the bank.
During the discussion between the farmer and the accountant there are a number of issues to consider.
Firstly, the opinion of the accountant should be obtained in relation to the quality of the farm record-keeping system; does it supply accurate timely information to the farmer? Is it a reliable basis from which to prepare accounts and determine the annual tax liability?
In order that the accounts have credibility, they must clearly demonstrate the source of funds to finance living expenses. When the bank is carrying out its annual review or assessing an application for additional loan facilities it will consider two issues in the annual accounts: the amount of profit retained by the business after the farmer’s drawings and the value of the net assets in the Balance Sheet.
Many Balance Sheets show the agricultural land at original cost and not current market value which has the effect of not reflecting the true net worth of the farm business and this may have an adverse effect on the pricing of the facilities from the bank.
Secondly, the meeting with the accountant is an appropriate opportunity to review the business structure: sole trader; partnership and limited company. Does the current business structure allow tax to be minimized and is it sufficiently flexible to facilitate effective decision-making and encourage succession planning? For those farm businesses trading as a limited company, the new dividend tax rules require an urgent review of profit extraction strategy.
Thirdly, the annual accounts should be reviewed to ensure that they reflect all of the transactions throughout the year: that all of the turnover is included and that all business expenses have been claimed. Payments to members of the family who work on the farm should be claimed as a business expense and if required the appropriate PAYE returns filed.
If a member of the family is attending a recognized further/higher education course, directly related to farming for at least one academic year, this person can be paid a training allowance up £15,480 per year over and above the normal wage. This constitutes an allowable expense to the farm business. The travelling and subsistence costs of travelling to and attending agricultural shows and farm visits should be recorded in the farm records and claimed as a business expense.
The annual accounts are an important element in ensuring the sustainability of the farm business and enable the farm family to maintain a positive relationship with each member of the family, with Revenue & Customs and with the Bank.
For further information, contact Seamus on (028) 8224 1515.