Tax tips for the farming business

With the end of the EU Common Agricultural Policy in the UK imminent, the farming business has big change on the horizon. It is therefore a good time to review where you want your business to be in the future, and how you are going to get there.

There are a number of questions that could form the basis of such a review. You might, for instance, want to look at your current business structure. Is the structure optimal, or might this be the time to introduce a partner to the business – for the family farm to bring in the next generation, for example? A plus point here might be lower tax, as partners are taxed just on their share of profits. It might also mean that a lower tax band could be accessed.

However, the timing of changes in the partnership can have significant tax consequences, so this is not a decision to take in isolation. As a case in point, farmers’ averaging is a planning tool which can help keep tax bills down amid fluctuating profits. This may be particularly relevant after the impact of drought on crops and livestock this year, for example. But there are also other points to factor in, such as the impact on Class 4 National Insurance contributions. All in all, any decision will need careful consideration within the context of the business as a whole.

Traditionally, averaging meant spreading over two years, but it is now possible to average over two or five years – or not at all. There is, as always, small print to attend to. Averaging is not an option for farming companies – only sole traders and partners. Access to five year averaging is not automatic: eligibility is decided by putting the numbers through a ‘volatility test’.

And as mentioned above, the timing of exits or entrances to the partnership can have important repercussions. Averaging claims cannot be made in the year of commencement or cessation. Partners leaving or joining an existing partnership are also affected by these rules; they are unable to make an averaging claim in these years. Timing is therefore key. It will be important to monitor the position for each individual partner, as the impact of averaging will not necessarily benefit every member of the partnership.

Liquidity is another important factor to consider. The timing of capital expenditure and ability to claim capital allowances can affect taxable profits and the size of tax bills. It can also impact averaging claims, averaging being calculated on profit after capital allowances. Again, an overarching plan to take your business through the next few years is likely to pay dividends. We would be happy to advise.