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New Year is an ideal time to get your tax affairs in order on the farm

Downtime over Christmas and New Year can bring the ideal opportunity to take stock of your tax affairs.

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New Year is an ideal time to get your tax affairs in order on the farm

Although effective tax planning can mean parting with cash through bringing forward expenditure or investment, the tax savings can be significant.

 

There are numerous simple strategies which can be implemented around the business’ financial year-end to maximise tax benefits.

 

Benefit

 

Martyn Dobinson, a partner at Saffery Champness and a member of the firm’s landed estates and rural business group, outlines eight areas for consideration which could provide a significant tax benefit.


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MAXIMISING RELIEF FOR CAPITAL EXPENDITURE

FROM January 1, 2019, until December 31, 2020, the Annual Investment Allowance (AIA) has been temporarily increased to £1 million.

 

Expenditure on qualifying plant and machinery up to £1m in the financial year will benefit from a 100 per cent deduction for tax in the year of acquisition.

 

Planning the timing of investment in new equipment is critical to make maximum use of this relief.

 

As an example, for a limited company, every £10,000 of qualifying investment, up to the available limit, can reduce the corporation tax bill by £1,900.

 

Saving

 

And for unincorporated businesses, the tax saving can be much higher.

DEFERRING TAXABLE PROFITS

IN certain instances, income can be legitimately delayed or expenditure accelerated by just a few weeks or days.

 

This can have the effect of shifting taxable profits into the following financial period, thereby deferring the tax bill associated with those profits by 12 months.

 

Professional advice is recommended to ensure compliance with the rules around accruals accounting and matching of income and expenditure.

CONSIDER PROFIT AVERAGING

ELIGIBLE farmers may be able to use the profit averaging rules to smooth out fluctuating profit levels and consequently reduce tax payments to HMRC in years where taxable profits are higher.

 

This will mean tax payments in respect of years in which there are lower profits are higher than they would otherwise be, but this can be an effective tool to smooth tax cash outflow when profitability is volatile.

 

Since April 2016, farmers have had the option to average their profits for tax purposes over any two or any five consecutive years as an alternative to simply paying the tax due on taxable profits arising in those years.

 

Again, this is complex and professional advice should be taken.

MAKING PENSION CONTRIBUTIONS

EMPLOYER pension contributions are a taxdeductible expense for the business in the year in which they are paid.

 

By making employer pension contributions before the business year end, tax relief can be maximised.

 

Contributions

 

As employees and directors are not taxed personally on the employer pension contributions they receive, this is a tax efficient method of rewarding your team.

 

In some cases, care needs to be taken to ensure those in receipt of these benefits do not exceed their annual tax-free pension allowance of £40,000, which may also be tapered for higher earners.

 

Allowance

 

However, it can also be worth noting that if an individual has not used all their available annual allowance in any of
the previous three tax years, then any unused amount in respect of those years can be used in the current tax year.

CLAIMING RESEARCH AND DEVELOPMENT TAX CREDITS

COMPANIES can claim tax relief for qualifying research and development expenditure in the year in which that expenditure is incurred, provided certain conditions are met.

 

Relief is available to both profitable and to loss-making companies.

 

Some farming businesses will certainly be eligible for R&D tax reliefs, particularly where new or innovative techniques are being developed.

PAYING DIVIDENDS OR BONUSES

A DIVIDEND or bonus payment can be made before the year-end.

 

This can have advantageous tax implications for the business and the recipient.

 

A bonus will be an allowable deduction for tax for the business, whereas a dividend paid by a company is not and is paid out of post-tax profits.

 

The company needs to have distributable reserves available to allow it to pay a dividend.

 

Allowances

 

Paying a bonus or dividend to an individual can allow full use to be made of available tax-free allowances and lower tax bands.

CLAIMING LOSS RELIEF AS EARLY AS POSSIBLE

IF a tax loss is anticipated, then tax returns including tax loss carry back claims should be filed as quickly as is practical.

 

This will ensure any tax refunds due are received as soon as possible, but it may also mean annual accounts need to be finalised sooner than they would otherwise have been.

ROLLOVER RELIEF

TAX arising on capital gains for companies, sole traders or partners in a partnership, may be deferred where disposing of and reinvesting in qualifying land, buildings, fixed plant or goodwill.

 

Replacement

 

The deferral works by deducting these gains from the base cost of the replacement asset.

 

Proceeds must be reinvested in the 12 months preceding or the 36 months following the disposal, part reinvestments can also qualify, and the reinvestment does not need to be in an asset in the same qualifying category.

 

Disposals

 

Businesses should consider the timing of capital disposals and investments to ensure they fall within these specified time limits to benefit from the deferral.

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