Uncertain commodity prices and fluctuating input costs are a recurring theme for our farming clients. However, the increased wheat price over the last six months or so has made the economics of farming even less predictable.
Of course, a high wheat price for arable farmers means increased feed costs for any business that involves livestock, and so there is huge variation in the profitability of the industry. Increased feed prices are also contributing to the high level of inflation currently being seen for agricultural inputs, with commentators suggesting that the rate of ‘agflation’ is approaching 30%.
It is against this backdrop that farmers need to continue to run their businesses in as profitable way as possible whilst managing cashflow and minimising tax liabilities: not an easy task!
It is likely that arable farmers are going to see high levels of profit for the 2022 harvest, on top of relatively strong profits from the 2021 harvest. Thoughts are therefore turning to the increased tax liabilities that will result. The £1m Annual Investment Allowance still provides scope to save tax through the purchase of machinery, but thought needs to be given to future cashflows if machinery is financed and repayments spread forward across potentially less profitable years. At the time of writing the Annual Investment, Allowance is expected to reduce back to £250,000 from 1 April 2023, providing further incentive to change machinery before then.
Contributions to personal pensions can also provide an effective way of taking profits out of the highest rates of tax. An individual paying tax at the highest rate of 45% can invest £10,000 in a personal pension for a net cost after tax relief of £5,500. It is not always correct to think of a pension as being a completely stand-alone investment: there is scope to use pension funds to reinvest in assets to be used by the farm, for example, the purchase of land or construction of a farm building. Pension contributions need to be made during the relevant tax year; planning is therefore needed before 5 April to calculate the optimum contribution.
Finally, we still have Farmers’ Averaging available to us. This helps to smooth out profits and tax liabilities. We have found five-year averaging to be particularly beneficial to our partnership and sole trader businesses over recent years.
On top of financing increased tax liabilities, the working capital required to fund the business needs to be considered. Check your cashflows and budgets for the coming year before harvest, factoring in current input and sales prices.
Of course, not all farmers are going to see improved profits and so it will be important to look ahead and estimate what you expect profits to be. Claims to reduce tax payments on account will be increasingly relevant when the impact of increased input costs flows through into reduced profits. Accurate forecasts will avoid you paying upfront against a tax liability that may never materialise.
As ever, farming is a long term business requiring the resolve to plant crops or produce animals with little certainty over future sales values. Concerns about tax liabilities should not influence your operational decisions, but an understanding of how these decisions feed into your ‘bigger picture’ tax position is critical. As an example, it might be that your business has outgrown your current trading structure meaning that organisational change is needed – this is commonly the transfer of the farming business to a limited company.
The specialist Agricultural and Property team at Ellacotts continue to be available to talk through your tax position and consider the financial impact of the decisions that you will be making. Please telephone your usual Ellacotts contact.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.