Can You Save Tax with Five-Year Farmer’s Averaging?

Tax return - Farmers Averaging

You should by now have filed, or be the process of preparing, your tax returns for 2016/17. Have you remembered however, that as of 6 April 2016, farmers have the option to average their profits over five years? Two-year averaging is still available, and you can choose which is most beneficial for you – two-year, five-year or no averaging.

This is a valuable relief for those who have experienced fluctuating profits and can result in substantial tax savings.

Example

We can consider this using the example of Farmer Jones, who had the following profits in tax years 2012/13 to 2016/17.

Tax year 12/13 13/14 14/15 15/16 16/17
Profits £
Nil (loss) Nil (loss) Nil (loss) 5,000 70,000
2 year averaging 15/16 and 16/17
37,500 37,500
Tax & Class 4 NIC 7,949.60 8,029.60
5 year averaging
15,000 15,000 15,000 15,000 15,000
Tax & Class 4 NIC 2,044.50 1,764.05 1,633.96 1,504.60 1,424.60

The overall tax and class 4 NIC due without averaging is £20,884.60. With two-year averaging it would be £15,979.20 and with five-year averaging, £8,371.71. That is a significant tax saving of £7,607.49 for opting for five-year averaging over two-year, and illustrates the importance of this new relief.

This simple example assumes that Farmer Jones has no other income. You must also ensure that you meet the qualifying criteria before claiming Farmer’s Averaging.

If you’d like any further information please contact Green & Co on 01633 871122.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

The Farmer and The Five-Year Rules

pigs on the farm

There are two five-year rules that every farmer should be aware of, both of which affect the tax they pay. One has been in place for quite some time and the other was introduced in April 2016. Here is a quick re-cap of both.

The ‘five year loss’ rule seeks to ensure that farmers claim losses only when they are operating a commercial business (as opposed to a hobby). Self-employment losses can be offset against other income in the year in which they occur, or they can be carried back and offset in the previous year. However, a farmer cannot use a loss in this way if he or she has also made losses in each of the previous five tax years.

Farmers will be well versed in farmer’s averaging. Historically this allowed them to average their profits over two years in order to reduce unpredictable tax bills caused by fluctuating profits. Farmers can still average over two years; however, as of the 2016/17 tax year, they can also elect to average their profits over five years. So they now have three options in determining taxable profit.

There we have it in very brief form – a bunch of fives and a high five!

If you’d like any more information on this or any other tax-related farming queries, please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

 

Just An Average Farmer

iStock_000014425346_Small.jpgPrior to 6 April 2016 farmers were only able to average profits over 2 consecutive tax years. From 6 April, farmers will have a choice of averaging over 2 years or 5 years.

The introduction of this 5 year average period will be of great benefit to farmers whose profits can fluctuate considerably over a number of years. The two year average option would have been little help to a farmer who had had 3 good years where higher rate tax had been incurred, followed by 2 bad years.

Example – 2 year averaging claim

Tax Year 2012/13 2013/14 2014/15 2015/16 2016/17
Profits 60,000 60,000 60,000 10,000 10,000
Averaging Claim 14/15, 15/16 35,000 35,000
Averaging Claim 15/16, 16/17 22,500 22,500
Total Taxable Profits after all averaging claims 60,000 60,000 35,000 22,500 22,500

 

If a 5 year averaging claim is applied the assessable profits become:

Tax Year 2012-13 2013-14 2014-15 2015-16 2016-17
  40,000 40,000 40,000 40,000 40,000

Depending on other income this 5 year claim has removed the liability to higher rate tax which would save about £12,000.

TAX PLANNING

The ability to choose whether to average over 2 or 5 years gives scope for the farmer to plan the timing of capital expenditure if approaching the end of the fifth qualifying year. It may also be possible to utilise personal allowances which may otherwise be wasted.

The first opportunity to utilise the 5 year averaging rules will be in the  year ended 5 April 2017. Profits muse be reviewed before the year end to ensure any planning opportunities can be under taken.

For more information contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

 

Tax Savings For Farmers

www.greenfarms.bizFarm profits can fluctuate wildly from year to year due to many uncontrollable factors, from the weather to world commodity markets. This means that in one year you may have a very high tax bill, and in another nothing to pay. In order to smooth this out, you can make a Farmers’ Averaging Election to average the current year’s profit with the previous year. Used correctly, these Elections can substantially reduce your tax bill and improve cash flow.

Profits from two consecutive years can be averaged if the profit from one year is less than 70% of the profit of the other year. The adjustment results in each year’s taxable profit being half the total of both years. For example:-

  • Year ended 31 March 2012 taxable profits are £20,000
  • Year ended 31 March 2013 taxable profits are £50,000

We would elect to average your profits so that you would pay tax based on the average profit of £35,000 in each year. This could save up to £1,950 tax in this case.

The relief is available to Sole Traders and Partnerships but not Limited Companies.

In the last 6 months alone, we have managed to save our clients over £61,000 by making Farmers’ Averaging Elections.

If you have any queries regarding Farmers’ Averaging, please contact us on 01633 871122.

 

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.