Single Payment Scheme 2008- what impact does the abolition of the ten-month rule have on clients accounts and tax liabilities?
26 May 2008
Farmers reading this should be breathing a collective sigh of relief that they have completed their Single Payment Scheme application forms for another year.
You will be aware that the 2008 Single Payment Scheme (SPS) rules were changed such that farmers no longer have to manage a parcel of land for at least ten months in order to claim Single Payment on it. UK farmers are now required simply to have the land used to support their SPS claim at their disposal on one day, 15 May in the year of claim. The SPS applicant remains responsible for ensuring that cross compliance requirements are met for the whole calendar year, even if the applicant does not occupy the land for the complete calendar year.
Although this simplification is welcome, depending upon the circumstances of the individual farmer there may be unexpected implications for the farms’ accounts and tax position. This requires urgent thought.
Old rules
In 2007 and earlier years, the SPS for a scheme year was recognised in a set of accounts if the ten-month occupation period selected by the farm had ended on or before the accounts year end. The SPS for a calendar year was then brought in on a time- apportioned basis- e.g. 9 months for a September year end.
New rules
For accounts year ends after 15 May 2008, 2008 SPS is recognised, again on a time- apportioned basis.
The effect of the change
Depending on the ten- month occupation period previously selected by the farmer, and their accounts year end, there may be a "bunching" of SPS in the 2008 accounts. Up to two years’ SPS may fall into the 2008 accounts, substantially increasing the tax due in January 2010.
This may just be a (possibly significant) cashflow timing issue. However, it may cause farmers to unnecessarily pay substantially more tax on their 2008 accounting profits, especially if they move from being 20% to 40% taxpayers as a result of this change. It may therefore be beneficial for farmers, together with their advisors, to consider shortening accounting periods ending after 15 May 2008 to a date before 15 May - probably 30 April 2008. This is something we at Ellacotts LLP are addressing with those clients significantly affected by this change.
An example
A three-partner farming partnership, with a year end of 30 June, and SPS receipts of £80,000 pa. Under the old rules, the farm’s ten-month period ended on 31 July. Underlying farm profit, excluding SPS, is £100,000.
The accounts to 30 June 2007 included none of the 2007 SPS as the ten-month period had not ended. They included all of the 2006 SPS.
The accounts to 30 June 2008 will include all of the 2007 SPS, and 6/12 of the 2008 SPS, 30 June 2008 of course being after 15 May 2008. The 2008 SPS will be time-apportioned.
2008/09 (old rules) |
2008/09 (new rules) |
|||
| Underlying farm profit | £100,000 |
£100,000 |
||
| 2007 SPS | £80,000 |
£80,000 |
||
| 2008 SPS | - |
£40,000 |
||
| Total | £180,000 |
£220,000 |
||
| Tax thereon (3 partners) | ||||
| 3 x £5,435 @ 0% | 0 |
0 |
||
| 3 x £36,000 @ 20% | £21,600 |
£21,600 |
||
| Balance at 40% | £22,278 |
£38,278 |
||
Tax increase: £16,000 (£40,000 x 40%). This may be higher if the change causes a client to move from the 20% to the 40% tax band.
Which farmers is this important for?
- Generally those with year ends after 15 May 2008 and before 31 October 2008 (the effect in year ends Nov-Dec is less due to the time-apportioning of the previous year's SPS).
- Companies (because there is no possibility of smoothing out this effect under the farmer’s averaging rules, which do not apply to companies).
- Clients with higher SPS receipts.
- Those where the sole trader's/ partners' profits are not covered by losses brought forward.
- For some farmers with a history of long-term loss-making, this one-off increase in profits may be an advantage. HMRC rules exclude the relief of farming and market gardening losses against other income where losses have been incurred in each of the previous five years. Losses here are as calculated for tax purposes, before deducting Capital Allowances. This is commonly known as the “hobby farming rule”. This “bunching” of SPS may mean that some long-term loss-making clients may achieve a profit in 2008, thereby breaking the "hobby farming" losses pattern such that loss relief against other income is available again.
If it is beneficial to bring the client’s year end forward to a date prior to 15 May (e.g. 30 April), normal year-end information will need to be recorded swiftly as at 30 April- i.e. stock-take, etc.
HMRC will normally permit a change to the business year end, where: -
- there has been no change of year end in any of the five previous tax years, or
- If there has been a change of year end in any of the five preceding tax years, the latest change must be made for genuine commercial reasons (i.e. not just to save tax!)
Any queries please contact Helen King at Ellacotts LLP, UK200Group Agricultural Group member firm on 01295 250401 or e-mail hking@ellacotts.co.uk.
