Profits (and losses) for farm businesses are known to fluctuate quite substantially year on year for a number of reasons which are often beyond the control of the farmer. For an arable farmer, the quality and yields achieved are affected by weather patterns and the effect of uncontrollable pests and weeds, such as flea beetle and blackgrass. Global commodity prices and the value of the pound also dictate the selling price achievable for harvested crops and livestock, as well as input prices for inputs.
The current tax system also adds to the potential fluctuations with the ability to claim 100% tax allowances (the Annual Investment Allowance) on up to £200k (£1m up to 31 December 2020) of machinery purchases each year, through the capital allowances legislation. This can cause substantial peaks and troughs in taxable profits being reported to HMRC each year. The impact this has on personal tax is substantial and this is why for many years farmers and market gardeners have been able to benefit from a well-known tax adjustment known as ‘farmers’ averaging relief’.
The positive effect that farmers averaging relief can have is twofold:
- it can help to keep taxable income below certain tax thresholds and utilise tax allowances to reduce the annual tax burden; and
- there can also be a cash flow benefit with reduced payments on account for the following tax year.
Since 2017, taxpayers eligible for the relief have been able to benefit from an extension to the rules, allowing for the taxable profits to be averaged over either five tax years or two tax years, and have the option to decide which method to use on a year by year basis. This has provided welcome relief to some taxpayers from potentially onerous tax liabilities.
Aside from the headline Income Tax rates, there are other considerations to be made when deciding whether or not to claim farmers’ averaging relief in any given tax year:
- will this affect our ability to access finance?
- will child benefit be repayable in any given year?
- will this impact the ability to gain a full state pension?
- will pension contributions gain maximum tax relief?
- are Gift Aid payments being fully utilised?
If you have any questions, please get in touch with your usual contact at MHA Larking Gowen, or email [email protected]
You can find contact details on the Our People section of the MHA Larking Gowen website.
Andrew Whiting