Farmers should review their business structure and discuss tax planning at least once a year to ensure they are making the most of available reliefs and support, according to a leading agricultural accountant.
Speaking at a Guild of Agricultural Journalists event in Northern Ireland, Omagh-based farm taxation expert Seamus McCaffrey gave his top tips to make your farm a tax-efficient enterprise.
It comes ahead of changes to corporation tax set to be introduced on April 1, 2023, which will see corporation tax increase from 19% to 25%.
Companies with profits of up to £50,000 will continue to be taxed at 19%. However, the new rate will be applied on a sliding scale for businesses with profits between £50,000 and £250,000. The full 25% will be applied at £250,000 or more.
Reinvest in your business
McCaffrey advised farmers and agri-businesses to consider making use of Capital Allowances on plant equipment and machinery to reinvest in their businesses.
All businesses are eligible for up to 100% tax relief on new or used machinery purchases totalling up to £1 million a year. The relief will be reviewed by Treasury before December 31, 2021.
Businesses that don’t need to write off the full amount at the time of purchase can write off 18% of the balance per year.
In addition to claiming the 100% relief referenced above, businesses registered as companies are also eligible to a further 30% tax credit on new plant equipment and machinery effectively creating a 130% “super deduction”, applicable from April 1, 2021, to March 31, 2023.
Also highlighted was a special tax credit to support business innovation. If the farm is structured as a limited company, it will be able to claim a 230% tax credit for any money invested in research and development.
This could be a helpful way to try out the viability of new products or even test new farming methods which could later have the potential to boost farm productivity or efficiency.
However, there are certain caveats that farmers need to meet in order for their trial to be eligible. Readers can find further details of what they might need to consider here.
Farm family members
McCaffrey also highlighted the importance of paying all members of the family who help with the business.
“It’s important for a family farm in Northern Ireland to remember that where family members are working on the farm they are entitled to a wage of a reasonable amount once they reach the age of 13,” he said.
“Where a son or daughter working on the farm attends a course directly related to farming for at least one academic year, the farm can pay the student a training allowance of up to £15,400 a year – that money constitutes a business expense on your farm accounts and it’s tax-free to the student,” he added.
“You also have the option to average profits over two or five years – the tax payer has the right to elect which,” McCaffrey said.
McCaffrey explained it means that profits are averaged out so that one good year in a volatile market doesn’t result in the business paying a higher rate of tax.
“If in one year you are paying tax at 40% and another year at 20%, if you average the two you pull down some of the profits that are being taxed at 40%,” he said.
“However, if you are a basic rate taxpayer every year at 20% averaging 20% and 20%, you will still get 20%, and likewise if you average 40% and 40%. You must have a bit of divergence between the two years or five years for averaging to be useful.”
Make sure your books paint an accurate picture
However, McCaffrey also urged farmers to ensure their balance sheet reflected an accurate picture of the value of their assets in the business, warning that keeping assets off the balance sheet or underreporting their income could affect their likelihood of securing a loan.
He also warned that sophisticated new HMRC software meant that under-reporting income would be likely to make them a target for a tax investigation.
“It will make your proposition to the bank perhaps more attractive and will allow you to get better pricing from the bank,” he said.
“For example, if I’m farming and I’ve never bought land because I’ve inherited it, that land might never be on my balance sheet because I’ve never paid for it. So the fact that if that land is not on the balance sheet it makes the balance sheet look weak, which may have adverse consequences when dealing with the bank,” he said.
“It’s very important each year to review the valuation of assets in the farm balance sheet to ensure they represent the true value.”