Plan ahead to trim your tax bill

With spring field work all but complete following favourable conditions, it may be time to start thinking ahead to possible tax planning opportunities to reduce tax bills following the recent uplift in commodity prices.

The increase in commodity prices, particularly potatoes, could see a lot of farmers either returning to profitability or see increased profits following the 2016 harvest.

As with all tax planning, it is essential to be proactive and review all options available.

Scottish taxpayers can broadly earn £43,000 a year and remain a basic rate (20%) taxpayer. With this in mind, it is worth considering some of the fundamental tax planning opportunities available to farmers.

Due to the relatively low commodity prices for the 2014 and 2015 harvests, farming businesses may have accumulated taxable trading losses, and if these have not been relieved against other income incurred in the same year, then following a return to profitability unused losses can be offset against profits of the same trade.

This gives an immediate reduction in exposure to tax.

Special tax provisions allow farmers to average profits over a number of years. Until recently this could only be done over two years, but from April 5 2016 profits can be averaged over five years. This helps even out profits and reduces exposure to tax where profits can be shifted from higher to lower tax bands.

Farmers still have the option to choose either the two-year or the new extended five-year average. The choice of whether to average or not falls to the individual and if they are a partner in a partnership, it can be the case that one partner chooses to average and the others do not, which does provide flexibility.

With the price of farm machinery ever increasing, making full use of capital allowances can dramatically help reduce taxable profits. Capital allowances provide tax relief on qualifying capital expenditure.

Capital allowances on the majority of farm equipment should qualify for an 18% writing down allowance, however if the business is eligible to claim the Annual Investment Allowance (AIA) then that expenditure could qualify for 100% write-off in the year of acquisition. The AIA is currently £200,000 per year.

Capital allowances provide a deduction against the taxable profits, and if the capital allowances are in excess of the profit then they can produce a taxable loss.

It is important to consider the timings of purchases and when the machinery is brought into use as this dictates when the capital allowances can be claimed. It is always worthwhile speaking with your accountant ahead of any large capital acquisition to confirm the tax implications.

Recent changes to legislation mean that pensions are being seen as one of the most tax efficient investments in the market.

A pension contribution can attract basic rate tax relief (20%) at source, whereby for every 80p contributed the Government will “top it up” with 20p.

Higher rate taxpayers can claim additional tax relief through their self-assessment tax return. At certain income tax bands, this can take the tax relief well in excess of the 45% top rate of income tax.

Pension funds are now much more flexible in how they can be accessed. They can provide farmers with an opportunity to accumulate an asset, very tax efficiently, outwith the farm which could be left to any non-farming children, possibly tax free.

Hopefully the improving results we are seeing will continue and efficient tax planning now should enable farmers to retain more profit, reduce tax bills or build up a fund outwith the business for future enjoyment or as part of wider succession planning.