How to Reduce the Tax on Better Profits
30th October 2008
For self-employed clients (whether sole trader or in partnership), 31 January 2009 is the due date for the balancing tax payment for 2007/08, and the first payment on account of the 2008/09 tax liability.
Many farming clients are now receiving mixed news from their accountants and tax advisers: the high grain prices achieved over the last year have produced high profits (good news!), resulting in high tax bills (bad news!) payable by 31 January 2009, at a time when increased input costs, poor returns from the 2008 harvest, and scarce finance are conspiring together against the farmer.
So what options are available?
Are the accounts and associated tax computations correct?
A good firm of accountants, who are knowledgeable regarding agricultural issues, will ensure:
- Year-end stock valuations are prepared in accordance with current tax rules (especially regarding the recent House of Lords decision in the William Grant & Sons Distillers and Mars UK case).
- Single Payment is taxed at the appropriate point.
- Recent changes to Capital Allowances legislation are considered and advice given regarding timing of investment.
Are there any beneficial tax claims available?
The 2008/09 payment on account element of your January tax bill could be reduced, either by a claim on your 2008 tax return, or submission of a form SA303 to H M Revenue and Customs. This action needs to be justifiable, typically because either business profits or other income are down for 2008/09. If the payments on account finally due are greater than the amounts paid, interest will be charged on the difference. Financial penalties will be levied if a claim includes false information.
Farmer’s averaging is available where tax-adjusted farming profits of one year are less than 70% of the previous or following year. Whether such a claim is beneficial is a question of fact, dependent on the total tax liability for the two years in question.
If profits are low, or losses are suffered, Small Earnings Exception may be available, whereby Class 2 National Insurance can be avoided.
Don’t be too proud to claim tax credits, if you qualify- a quick visit to www.hmrc.gov.uk/taxcredits may be worthwhile. A claim will require information that can be readily extracted from your tax return.
For some farming clients, a “spike” in profits may be advantageous, if ongoing losses would otherwise put the farmer at risk of a “hobby farming” challenge by H M Revenue and Customs, whereby farming losses cannot be offset against other income after 5 years of tax-adjusted losses.
Other Options
- Consider lengthening your accounting period to delay tax payments.
- Ensure that other family members’ personal allowances and basic tax rates are utilised:
- Pay a wage if their duties justify it (but ensure PAYE procedures are followed).
- Consider making pension contributions on behalf of any family member employed by the business.
- Take advice regarding bringing any relevant person into partnership.
Future years
Any panic about finding cash to meet tax liabilities is further compounded this year by many farmers not getting their books into their accountant until late, understandable given the struggle to finish harvest and autumn field work. However, as 31 March/5 April is by far the most popular year-end for farming clients, why weren’t the books sent in before harvest started?
More vital than ever is the need to prepare a business plan and cash flow forecast. If the results are not likely to meet target living costs over the coming years, talk honestly with your family or partners, consider your options and take advice. Painful, but better than a divorce or partnership dispute in the future.
If you are in the fortunate position of the future looking rosy, again take tax advice to mitigate future tax bills, e.g. using a corporate structure to reduce tax rates, or possibly a SIPP (Self Invested Pension Scheme).
As a UK Agricultural Accounting Firm, Ellacotts LLP is extremely experienced in tax planning and can help ease the tax burden in the majority of cases. For more information and access to our specialist expertise please contact John Thame, Helen King or Mark Dickin on 01295 250401.
