Year-end tax planning for farmers and agricultural businesses

by Hugh Simpson

Now into 2021, with the 2020 Harvest Year a distant memory (for a large number an unpleasant one), the end of the tax year is fast approaching. There are a number of opportunities in the short window up to 5 April 2021 for farmers and farming businesses to take that may reduce future tax liabilities.

The first step is reviewing financial performance to date to assess potential tax exposure.  If the estimated tax liabilities are substantial, then there are some options to help to mitigate this.

The business could make capital purchases prior to the financial year end. The cost of eligible capital expenditure (such as for tractors and farm machinery) can be offset against taxable profits using the Annual Investment Allowance (AIA).  The current AIA is £1,000,000 but is expected to revert back to the previous level of £200,000 from 1 January 2022; the current higher level gives most businesses the opportunity to claim full tax relief for eligible capital expenditure in the year it is incurred.

The cost of repairs to farm machinery and infrastructure is also deductible against taxable profits.  If any major repairs are required, ensuring that these are undertaken prior to the end of the financial year can help to reduce tax liabilities.

Another option to consider is personal pension contributions.  Subject to certain restrictions, contributions made before 5 April 2021 are grossed up for basic rate tax relief and decrease the amount of income taxed at higher rates.

Farmer’s Averaging may also assist. Farming profits can fluctuate significantly year on year, the averaging calculations look to smooth the profits over either a two or five year period to help ensure a fair tax liability overall. These calculations can be particularly helpful in reducing payments on account.

Reviewing the structure of a business, say by moving certain operations to a limited company, can also bear fruit from a tax perspective, however, this is more of a longer-term strategy and careful consideration should be given before exercising this option.

Finally, it should be stressed that tax planning decisions should always be made to compliment business activities, not just to provide tax benefit.

For more information, contact the Ensors Agricultural team.


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Hugh Simpson

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