With the 2019 cereal harvest a distant memory and the end of the tax year looming, now is the time to consider tax planning opportunities. For many farming businesses, there is a window of opportunity between now and 5 April 2020 to take action that may reduce future tax liabilities.
The first step is to review financial performance to date in order 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 (which includes items such as tractors and farm machinery) can be offset against taxable profits using the Annual Investment Allowance (AIA). The AIA has been increased from £200,000 to £1,000,000 from 1 January 2019 to 31 December 2020 giving 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. Contributions made before 5 April 2020 will give relief against any higher rate tax liabilities, with the added bonus that the government will top up the pension pot in order to give basic rate tax relief.
Farmer’s Averaging may also assist. Due to the fluctuations that tend to occur year on year with farming profits, individuals (not limited companies) are able to average their profits over a two or five year period to help ensure that a fair rate of tax is paid overall. Where the following year is not expected to deliver the same returns, it is also possible to reduce tax payments on account.
Although it will not assist with profits already generated, another option is to review the structure of the business. For example, a farm operating as a partnership may benefit from moving certain operations into a limited company.
Finally, it is important to always ensure that any action taken is fundamentally for commercial reasons and not just for tax purposes.