Plan ahead to minimise tax bills

Farm profits have never been more volatile than over the last 18 months and with the credit crunch affecting the whole economy the importance of conserving cash has never been greater. Tax legislation which allows farmers to average two years profits will smooth some of the fluctuations in taxable profits for sole traders and partners and may save tax and ease cashflow. Farmers need to work closely with their advisers to optimise the timing and amount of any capital expenditure, the timing and size of pension contributions, and the division of profits between family members. The key is to plan ahead.

Most dairy farmers will now have a pretty good idea of their profits to 31 March 2009, subject of course to milk price changes. However, it is also worth discussing the likely level of taxable profits with your accountant as utilising the 100% investment allowance on up to £50,000 of new equipment may reduce taxable profits significantly below those in the accounts. Even a small net investment with a part-exchange may substantially increase the allowances available eg. buying a tractor for £40,000 and trading-in the old one for £30,000 will frequently give you extra allowances of £34,000 in year 1 for a net outlay of £10,000.

The Chancellor has proposed a new income tax rate of 45% from 2011. However, for many self-employed receiving tax credits there is already an effective tax rate of 65%. This is basic rate tax of 20%, class 4 NIC of 8% and a 37 pence reduction in tax credits for each £1 of extra income. Tax planning is not just for high earners.

Make sure you speak to your accountant while there is still time to act before the end of your financial year. He may not rush to speak to you at the end of January so make it your New Year’s resolution to speak to him early in the month!

With quota values at less than 1ppl most dairy farmers who have purchased quota have significant unrealised capital losses. Most farmers can now crystallize these losses by making a negligible value claim without going to the trouble of selling quota in the open market. However, it is crucial to make sure that the losses will be realised by the same person who realises gains. Losses can be set against gains in the same or a subsequent tax year. If you hope to realise gains then plan to use any losses efficiently.