Paying tax and managing cash flow

Seamus McCaffrey
Seamus McCaffrey

At this time of the year many farm businesses are in contact with their accountant, particularly if they trade as sole traders or in a partnership as the 31 January is an important date, writes Omagh based accountant Seamus McCaffrey.

This is the date by which the returns must be filed but it is also the date by which tax requires to be paid. Sole traders and partners in a partnership pay tax in two instalments: 31 January and 31 July annually. By the 31 January 2017, sole traders and partners in a partnership are required to pay the balance of tax outstanding from the previous year and a payment on account for the current year.

The requirement to make a payment on account only arises if the total amount of tax payable in the previous year was in excess of £1,000.00. The amount of the payment on account to be made is normally 50 per cent of the liability of the previous years. However, if the farmer considers that the tax liability for the current year will be less than the liability for the previous year, the farmer has the right to pay a smaller payment on account by the 31 January 2017. The calculation of the lower payment on account requires careful consideration and detailed consultation with the farm’s accountant. Paying too small a payment on account may result in an interest charge by HMRC from 1 February 2017, if the actual liability for the current year exceeds the estimated payment on account made by 31 January 2017.

There are many tax planning opportunities for the sole trader or partner in a partnership to consider at this time of year. These include profit averaging, either the two year or five year options; utilizing farm losses in the most cash effective way; reviewing business structure to ensure the tax allowance of a spouse is availed of and if family labour works on the farm that this expense is properly recorded in the farm records and fully claimed as a business expense in the annual return filed with HMRC.

In addition to considering tax at this time of year, cash flow is currently difficult on many farms. It is therefore critical that time is allocated to calculating the least but correct amount of tax to be paid by the 31 January 2017, and managing payment to farm suppliers: food, fertiliser and contractors. Where possible the objective should be to achieve all of these without adding to the business overdraft. The techniques relevant here are updating the farm cash flow forecast and discussions with family members involved in the farm and with your accountant to best position the farm to manage cash flow, pay down suppliers and cope with volatility.