Wednesday, February 26, 2020

Plan now to avoid triple tax whammy later

January 30, 2020 by  
Filed under Property

Farmers should take action now to ensure poor weather doesn’t impact their obligations on tax, says John Harris.

No one needs reminding that last autumn was a disaster for farmers. Ongoing wet weather left many growers unable to get winter cereals in the ground – and the switch to spring cropping will only partially mitigate any losses.

Livestock farmers have also been directly affected. Cattle and sheep were housed earlier, simply to get animals off sodden ground. This in turn has led to earlier and heftier feed bills – again only partially offset by a plentiful supply of grass earlier in the year to make fodder.

The knock-on effects will last some time – including in financial terms, especially over the next 12-18 months. That’s because a reduced 2020 harvest is anticipated to generate significantly less cash with which to pay the taxation liability of the previous harvest.

In general, the 2019 harvest was reasonable in terms of yield although prices were a little ‘off’ from those of the previous year. Most arable farmers would have been satisfied and expecting a tax bill based on a reasonably healthy profit. 

Farmers with a year ending on 30 September 2019, 31 December 2019 or 31 March 2020 year end will see their tax for the fiscal year ending 5 April 2020 due on 31 January 2021.

Profit averaging will be available – both two-year and five-year. But it will probably not be possible to reduce the usual payments on account in January and July 2020 because these reflect the results of what is probably a reasonable result, as explained above.

What we do know, however, is that unless a minor miracle takes place, the 2020 harvest will not be as good in output terms. Prices may rise in reaction, but without the quantity of crop to sell, it is unlikely that the financial performance can be as good.

That will, in all probability, lead to lower tax bills in the fiscal year 2020/21. In turn, farmers will be able to reduce payments on account in January and July 2021 – but not before. The potential problem is therefore obvious: reduced cash flow to cover tax due this year.

As has already been stated, averaging and careful plant and machinery acquisitions can all play a part. But above all, careful cash flow planning and liaising with your accountant is important to see and understand the implications of what are almost unique circumstances.

No two farms are the same and the above is based somewhat upon generalisations. But it is fair to say that most farms will be affected by the above to some degree.

Additional banking facilities may be required and the sooner the banks are approached the better because it shows foresight. Above all, it is important that farmers and lenders understand the situation and its consequences because they are far from normal.

John Harris is a partner at chartered accountants Harris and Clarke. For details, call 01604 622274 or visit www.harrisandclarke.com.

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