Year-end tax planning for farmers and agricultural businesses

by Hugh Simpson

The 2021 Harvest, although a little stop-start, generally saw better yields and combined with the current high prices could make for a fairly profitable year (before the bite of the higher fertiliser prices). There are various opportunities in the short window up to 5 April 2022 for farmers and farming businesses to take that may reduce the tax liabilities.

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

The business could make capital purchases prior to the financial year end (assuming the kit can be delivered prior to the 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; this gives most businesses the ability 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, ensure that these are undertaken prior to the end of the financial year to help reduce tax liabilities.

Another option to consider is personal pension contributions.  Subject to certain restrictions, contributions made before 5 April 2022 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 2 or 5 year period so profits are taxed more consistently year to year. These calculations can be particularly helpful in reducing payments on account.

As always, any tax planning decisions should only be made to compliment business activities, not just to provide tax benefit.

Finally, most agricultural businesses will already be reporting VAT under the Making Tax Digital (MTD) regime, but it should be noted that from 1 April 2022 all VAT registered businesses will be required to comply with MTD for VAT regardless of their Turnover level.

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Hugh Simpson

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