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Profit averaging can save farmers cash at tough time

Rolling over profits from one year to the next can help farmers save money at a cash strapped time.


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Despite the current downturn in farm profits, many business may still have a large tax bill from last year which will need paying by the end of January 2016.

 

While times might be tough at the moment, the tax year ended March 2015 may have been extremely profitable for some, especially dairy farmers who benefited from high milk prices at the time.

 

With large profits comes potentially large tax bills, with last year’s needing to be settled by the end of January next year, not ideal when scores of farmers are struggling to achieve any profit margin.

 

For Rodger Hill, business services director at Cumbria-based accountancy firm Armstrong Watson, this was where tax averaging can play a key role.

 

Mr Hill said: "Farmers are currrently looking at a lot of their costs at the moment as things remain tight. However, with tax bills payable early next year it is something they have to think about."

 

Here is Mr Hill’s rundown of the main points farmers should be thinking about:

  • Current rules for tax averaging dictate a claim can be made as long as the difference between profits of two consecutive years is 30 per cent or more. The profits for both years are then added together and the farmer is taxed on half the total for each of the two years.
  • Relief was introduced to help minimise the effect of fluctuating profits the industry is susceptible to.
  • New rules are to come into effect from April 2016 and HMRC has issued a consultation document giving two options on how a new five year averaging calculation will work.
  • Both options have similarities in that profits for a five year period will be averaged, rather than the current two year limit.

 

 

How five year tax averaging will work

How five year tax averaging will work

Rodger Hill sad if farm prices improved five year averaging could be a good option.

He said: "If a business makes an exceptionally high profit of £150,000 in its 2017 accounts and its average profits for the years 2013-2016 were £30,000 we will be able to make an averaging claim and it will be treated as making a profit of £54,000 in each year.

"This should enable the farmer to avoid paying higher rates of tax on the bumper 2017 profits."

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