Minimising tax liabilities

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At this time of the year many farm businesses are in contact with their accountant, particularly if they trade as sole traders or as a partnership, writes Omagh based accountant Seamus McCaffrey.

For those who trade as a sole trader or a partnership, self-assessment tax returns are required to be filed by 31 January 2016. In addition the balance of tax, if any, for 2014-15 is payable by 31 January 2016 together with a payment on account for the current year. The amount of the payment on account is normally 50 per cent of the previous year’s liability, but there is an option to pay a lower amount if management accounts for the year to date indicate a lower liability.

If there is a difference of at least 30 per cent in taxable farm profits in any two years, averaging is allowed. This is particularly beneficial if, in one of the years profits were high resulting in some profits being taxed at 40 per cent and the next year taxable profits are significantly lower. Currently, legislation allows only two years to be averaged; however the Autumn 2015 Budget Statement proposed that averaging over five years will be introduced in the future.

If the farm business made a trading loss after claiming Capital Allowances there are options as to how this loss may be utilised. A trading loss may be carried back for one year, and if tax was paid in that earlier year, a tax refund may be obtained. Alternatively a trading loss may be carried forward and set-off against future trading profits from the farm. A trading loss in the year in which a son/daughter becomes head of holding may be carried back for three years and set-off against the son/daughter’s employment income, if in employment, resulting in a tax refund.

Where a young person aged 13 years assists on the farm a reasonable wage may be paid and claimed in the annual accounts as an allowable expense. If the young person is attending full-time a third-level college doing a course directly related to farming and is available to work on the farm, a training allowance of up to £15,480 may be paid to the young person, in addition to the wage.

This training allowance is an allowable expense in calculating taxable farm profits and is tax free in the hands of the young person. From 6 April 2015 employers are not required to pay Employers National Insurance where the employee is aged 21 years or less. There are some situations where the employer may be required to register with Revenue & Customs and this should be discussed with the accountant to the farm business.

Where the farm business has a breeding herd or flock, electing for the ‘herd basis’ may be beneficial. A ‘herd basis’ election is particularly advantageous, if there is an expectation that the value of the breeding stock is likely to increase. In this situation, electing for the ‘herd basis’ will avoid paying tax on the annual increases in the value of the breeding herd.

The above are a sample of the issues which require discussion with the accountant in order to determine how to minimise the farmer’s tax liability.