28 February 2018
For a lot of our farming clients who have a 31 March year end, the next month or so is a good time to consider and finalise Income Tax planning for the 2017/18 tax year.
Where to start when considering tax planning?
- A good starting position is an up-to-date and well-kept reputable bookkeeping software. To name a few we have Xero, Sage, Farmplan, Key Accounts or Sum-IT.
- Having adequate records to accurately value stock at any given month without having to pay a consultant. Again, current software offerings (eg. Gatekeeper) allow this.
- Make sure your farm’s fixed asset register is up-to-date and accurate in recording all of the additions and disposals to date.
- Finally, you will need a respectable sector-specific accountant who understands the business and its industry. (If you’re not sure if you have this, feel free to ask us for a second opinion.)
Given this information it shouldn’t take too long or be too costly for us to work out an estimate of your business’s taxable profits for the year. If planning is needed there are several options which you could help to reduce your tax liability.
Timing of capital purchases
On the top of most farmers’ lists is ‘shall I buy a new piece of kit?’, because let’s face it, who doesn’t like a shiny new machine to show off? I must stress that although capital purchases can be a useful tool in tax planning, the need to purchase new equipment must extend beyond tax planning and be part of the ongoing business plan for the farm. When we say tax planning here we’re talking about the timing of future purchases and perhaps bringing them forward to spread them more evenly over the tax years, not additional purchases!
A note should be made that when some assets are purchased under financing arrangements, the timing of the tax relief may not be as expected. Always clarify the tax treatment with your accountant.
Pensions are a very useful method of saving tax if the business has available/surplus cash and they can be used to increase the profits that are taxed at 20% rather than 40%. The key point to note is that the cash must be surplus to requirements; if the pension payment results in the use of an overdraft facility at a later date, then the tax benefit soon gets eroded by higher interest costs. Careful cashflow planning would be needed. Pension contributions will need to be made before 5 April 2018 as they can’t be backdated.
A further and more strategic long-term benefit of pensions is that older generations are less reliant on income from the continuing farming business when they decide to pass it on.
Averaging – two and five year
It’s standard procedure for us to consider averaging when preparing tax returns for farming clients, however we also consider it when planning. In principle, five year averaging is where we work out the taxable profit of each individual partner for the past five years, average them and then work out the tax for those five years based on the averaged profits.
The five year averaging rule was first introduced in the 2016/17 tax year and in a number of cases this has proved very useful for farmers. Looking at the past five years, we saw several record years for yields resulting in high profits but these were followed by some more testing times with low commodity prices. Averaging has meant we have been able to smooth or effectively spread the profits and as a result this has saved tax!
If you are concerned about any of the points in this blog please feel free to speak to one of our specialist rural and agricultural advisers or fill out our contact form here. Please also keep an eye out for the follow up blog on how to finance capital purchases.