Farmers beware of looming tax bills, warns Old Mill

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As farmers focus on fielding high input costs, it’s easy to forget that large tax bills might be looming, warns Philip Kirkpatrick, manager at rural accountant Old Mill.

Many farmers have seen significant increases in farmgate commodity prices since last December, however, these have not necessarily kept pace with the soaring costs of feed, fertiliser and fuel, which has put increased pressure on business profits and cash flow.

“A lot of farmers had a fairly profitable year in 2021/22,” says Mr Kirkpatrick. “Milk, livestock and cereals prices were pretty solid and, for many, fixed feed and electricity prices have meant that cost increases won’t hit until the next financial year.”

So how can farmers prepare and what can they do to minimise the tax bill? “Be aware that cash is king, so make sure you budget for January 2023 tax payments,” he says. “Get your accounts done early so you really understand what’s coming.”

For those who haven’t yet reached their year-end, there are options to reduce profits, and therefore tax incurred. “If you have spending planned, bring it forward to get the tax relief in this financial year – but only if you were planning to make those purchases anyway, don’t do it purely for tax reasons,” says Mr Kirkpatrick.

Remember, any machinery bought on finance must be delivered and put into use within the correct year to secure the relief, he adds.

And for anyone who has already passed their year-end, there are still ways to reduce tax bills: Sole traders and partners can make use of farmers’ averaging, whereby profits can be averaged retrospectively over two or five years, to even out fluctuating incomes.

Another option is to carry back any losses made in 2022/23 to reclaim tax paid in 2021/22. “There’s no limit on how much you can reclaim but you can’t do it until the end of the financial year, so you still have to pay the tax before reclaiming it,” says Mr Kirkpatrick. “It doesn’t get round the cash flow issue, so get your books done quickly to minimise the time between paying and reclaiming.”

A very tax-efficient option is to pay into pensions, and farmers can also look at investing in Enterprise Investment Schemes or Venture Capital Trusts, which also attract tax relief.

For individuals – not companies – forecasting a poor year ahead, one very useful tool is to reduce payments on account. “For 2022/23 these will be set on the high profits in 2021/22, with half due in January 2023 and half in July 2023,” he explains. “If you’re expecting profits to be lower you can reduce payments on account.”

But it’s important to forecast accurately; if payments are reduced below the actual income level then HMRC will charge interest on the difference. “However, with HMRC charging interest at 3.75% per annum it could work out as a good alternative to an overdraft facility.”

Looking ahead, farmers should keep their eye on changes in the pipeline. “Individuals and partners who don’t have a March year-end will have to align with the tax year between now and April 2024, so they could potentially be taxed on more than 12 months’ income in one go.”