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.

Concern For Rural Businesses Over Changes to Business Rates

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The Countryside Alliance has joined rural businesses and local councils in expressing concern over changes to business rates being proposed by the Valuation Office Agency (VOA) and the Government, with Welsh MP, Glynn Davies, even declaring there could be an “uprising” as a consequence of the proposals.

The changes, expected to be implemented in the coming tax year, involve the revaluation of properties, apparently focusing on the size of a premises, regardless of the nature and profitability of the business utilising it.  A spokesperson for the Countryside Alliance has suggested that many smaller rural enterprises who may have enjoyed rate relief in the past could now face significant increases, which could have damaging consequences.

Most likely to be affected are riding schools, kennels, stud farms and vineyards.  A recent report by the Association of Convenience Stores clearly shows that many such businesses provide an “immense social role” and are an integral part of rural life. As such, the negative effect of increases in business rates on rural communities could be substantial.

All concerned parties have called for the VOA and the Government to re-consider their proposals, suggesting rural businesses require extra support rather than becoming “disadvantaged” by the proposed revaluations.

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

Tax Relief for Farmhouse Renovations

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It is very likely that at some point your farmhouse and other buildings used in the farming business will require refurbishment, and it is important to be aware that whereas some repair expenditure can be relieved in the year it’s incurred (subject to a disallowed proportion for private use of buildings), alterations and improvements cannot. This is known as capital expenditure.

Repairs carried out which simply restate the building to its original condition are typically allowable as revenue expenditure. On the contrary the cost of replacing, improving or altering an asset is normally capital expenditure and can be relieved on disposal of the asset.

These rules extend to rental properties and in addition there are rules for rental properties purchased at below market value because they require extensive work in order to be habitable.

‘Capital versus revenue’ expenditure is a highly contentious issue and many cases have gone through the courts because HM Revenue & Customs and the taxpayer have disagreed over the tax treatment.

If you have any queries about taxes and the farming business 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.

The Farmer and The Five-Year Rules

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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.

 

Your Redundant Farm Building could be Restricting your Inheritance Tax Relief

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Agricultural Property Relief (APR), if obtained, allows an individual to pass on agricultural property, either in their Will or during their lifetime, free of Inheritance Tax (IHT).

Business Property Relief (BPR) reduces the IHT payable on a wider class of qualifying business assets when they are left in a Will or passed on during lifetime.

In order to qualify for APR farm buildings must be occupied for the purposes of agriculture – derelict buildings will not qualify for the relief. Similarly, if the property has not been used wholly or mainly for business purposes in the two years prior to the transfer, BPR will not be secured.

It’s important for all Farmers to consider their exposure to IHT and if farm diversification is currently being pursued, i.e. alternative uses of agricultural land and buildings, then it’s wise to act sooner rather than later.

If you would like further advice on Inheritance Tax 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.

Tax Allowances on the Farm

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Certain plant and machinery can qualify for what’s known as Annual Investment Allowance (AIA), which allows businesses to claim for the cost of the new asset (up the specified threshold) in the year of purchase.

The current Annual Investment Allowance is £200,000 (in the year to 31 December 2015 the limit was £500,000) and it’s expected to stay at that level under the current Government. Plant and machinery that doesn’t qualify for AIAs can have writing down tax allowances of 18% or 8% (current year rates).

HMRC have accepted that silage clamps and slurry pits qualify as plant and machinery, which is of particular importance to farmers due to the Nitrate Vulnerable Zone Legislation.

There are many intricacies within this area of tax so it’s good practice to check with your tax adviser whether new assets or work qualify as plant and machinery in order to maximise AIAs.

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

HMRC Warns Farmers To Declare Subsidies On Tax Returns

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Farmers claiming the BPS are being reminded by HM Revenue & Customs that these support payments must be included on their tax returns to avoid possible fines.

Several farmers have been written to by HMRC reminding them that subsidies are taxable and need to be declared on tax returns.

Some may be worried by the letters, whereas in most cases BPS payments have already been included on the returns. Fines for not declaring income can be up to 60% plus interest, so if you are in any doubt, it is worth asking an accountant to check for you.

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

Image courtesy of adamr at FreeDigitalPhotos.net

 

Happy Holidays From Green & Co

20151218_133025232_iOS.jpgAs we take our Christmas break at the end of another productive year, we would like to take this opportunity to thank you, our loyal blog readers! Whether you are already a client, a prospective client, or just like to read our informative articles each week, it is you who keeps this blog going.

Working with our clients in 2015, has also helped to grow Green & Co’s services, allowing us to assist our clients in both setting and achieving their goals. Our services span from general accounts to business goal setting and much more…

  • Year-end and management accounts
  • Tax returns and tax planning
  • Auditing
  • VAT and bookkeeping
  • Payroll (Including Auto Enrolment)
  • Construction Industry Scheme (CIS)
  • Sage Training
  • Business forecasting and goal setting
  • Exit strategies
  • Profit improvement
  • Profit extraction
  • Corporate re-structuring
  • Inheritance tax review and estate planning
  • Virtual office services

Green & Co also specialise in accounting for a number of fields:

  • Doctors
  • Property developers
  • Independent financial advisors
  • Solicitors
  • Insurance brokers
  • And of course, farming!

If you would like to know any more about any of the above, please give our friendly team a call on 01633 871122 once we are back from our Christmas break – refuelled and recharged to combat another year together!

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Farmers Averaging Election Success

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We are delighted that lobbying on the proposed extension of Farmers’ Averaging Elections from 2 years to 5 years has paid dividends. It was announced in the budget that farmers will have the option of either 2 year or 5 year averaging.

We were very worried that the initial proposal to only allow 5 year averaging would have made the system almost unworkable and rarely useful.

The system of 2 years Averaging Elections saves our Farming clients around £100,000 in tax every year so this would have been a big loss particularly in these difficult times.

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

Image courtesy of Frankie242 at FreeDigitalPhotos.net

Farm Groups Call For Flexibility

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Farm groups NFU and the Country Land & Business Association (CLA) have called for HMRC to have flexibility on the implementation of the new five year period for tax averaging.

In his budget earlier this year, the Chancellor made the concession after it was argued that help was needed  for British farmers to better cope with the volatility of the current market.

A recent consultation by the government into the introduction of the plan from April 2016, outlined two options. The first would involve the extending of the existing two year scheme to a rolling five year, but with a volatility test in place to help assess eligibility. The second would be an optional scheme where farmers could chose to opt in for a fixed five year period irrevocably.

The CLA has argued that volatility could be experienced over much shorter periods that five years, so farmers should be able to choose whether they would want to average their profits over a shorter time scale.

While NFU admitted that the five year period would be beneficial ‘most of the time’, they added that the current two year period should be retained ‘as an option’, as well as introducing the extended five year averaging period.

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

Image courtesy of Simon Howden at FreeDigitalPhotos.net