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Tax tips for farming businesses

17th January, 2019

With the end of the EU Common Agricultural Policy in the UK imminent, the farming industry has big change on the horizon. Nottingham chartered accountants Clayton & Brewill provides advice on reviewing your business in light of the changes, as well as providing some tax tips for farming businesses to consider when conducting this review.

What is the EU Common Agricultural Policy?Tax tips for farming businesses

The EU Common Agricultural Policy was launched in 1962 and is a partnership between agriculture and society, and between Europe and its farmers. Its main aims are to support farmers and to ensure consumers have a stable supply of affordable food.

On the 1 June 2018, the European Commission presented legislative proposals on the future of the Policy form 2020. However, with Brexit looming the UK’s future within the Policy is in doubt and farming businesses should take steps to review their situation.

Reviewing your farming business

There are a number of questions that could form the basis of such a review. You might, for instance, want to look at your current business structure. Is the structure optimal, or might this be the time to introduce a partner to the business – for the family farm to bring in the next generation, for example? A plus point here might be lower tax, as partners are taxed just on their share of profits. It might also mean that a lower tax band could be accessed.

Tax consequences to consider

However, the timing of changes in the partnership can have significant tax consequences, so this is not a decision to take in isolation. As a case in point, farmers’ averaging is a planning tool which can help keep tax bills down amid fluctuating profits. This may be particularly relevant after the impact of drought on crops and livestock this year, for example. But there are also other points to factor in, such as the impact on Class 4 National Insurance contributions. All in all, any decision will need careful consideration within the context of the business as a whole.

Traditionally, averaging meant spreading over two years, but it is now possible to average over two or five years – or not at all. There is, as always, small print to attend to. Averaging is not an option for farming companies – only sole traders and partners. Access to five year averaging is not automatic: eligibility is decided by putting the numbers through a ‘volatility test’.

And as mentioned above, the timing of exits or entrances to the partnership can have important repercussions. Averaging claims cannot be made in the year of commencement or cessation. Partners leaving or joining an existing partnership are also affected by these rules; they are unable to make an averaging claim in these years. Timing is therefore key. It will be important to monitor the position for each individual partner, as the impact of averaging will not necessarily benefit every member of the partnership.

Liquidity is another important factor to consider. The timing of capital expenditure and the ability to claim capital allowances can affect taxable profits and the size of tax bills. It can also impact averaging claims, averaging being calculated on profit after capital allowances. Again, an overarching plan to take your business through the next few years is likely to pay dividends.

Clayton & Brewill’s specialist farm accountants understand how farming and rural businesses work, meaning that you get proactive and effective accounts and tax advice to support your business, your family, and you.

For more advice on reviewing your farming business or if you’d like to discuss any of the areas mentioned above, please contact us.


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