1976 all over again?

With prices rising across a range of commodities Scott Greig looks at potential ways to manage the tax issues following from improved profitability.

Many are already likening 2018 to 1976 when, for those old enough to remember, a prolonged drought led to reduced potato yields which was more than compensated for by a sharp increase in price. Many farming businesses saw a significant increase in their underlying profits, which at the time was welcome but it did raise the question, “how much tax will I have to pay?”.

With the potential for the 2018 harvest to produce a similar uplift in profits, now may be the time to consider various strategies to ensure that tax liabilities are minimised as far as possible. We set out below a range of options.

Farmers averaging

Due to the volatility in the agriculture sector farmers can average their taxable profits over two or five years. This allows profits to be aggregated together and then taxed on the average value over the set number of years. This can help reduce exposure to tax by taking income out of higher rate tax bands and taxing it at basic rate or being covered by the personal allowance. We have had some great success in securing substantial tax repayments for clients by utilising averaging over the last few years.

Pension planning

Tax planning around pension contributions has become more appealing over the last few years following changes in pension legislation. A pension contribution increases the individuals basic rate band for tax purposes allowing more profit to be taxed at basic rate rather than higher rate. Targeted pension planning can provide significant tax savings and we have had recent success with pension contributions providing effective tax savings of over 50%. Please be aware that pension planning is complex and requires specialist advice.

Discretionary expenditure

Farm repairs attract 100% relief against profits and many businesses have a programme of repairs already scheduled. It may be prudent to undertake repairs ahead of schedule to help manage profits when cash will be available.

Capital allowances provide tax relief on capital expenditure and businesses which are entitled to claim the Annual Investment Allowance (AIA) can write off up to £200,000 of qualifying expenditure against profits in the year of purchase.

Business structure

When businesses operate as a sole trade or partnership the profits are subject to income tax and national insurance. Currently Scottish income tax payers have five tax rates to contend with, with the higher and additional rate tax being 41% and 46% respectively plus 2% national insurance, for those below state pension age.

An alternative may be to convert to trading as a limited company. Company profits are subject to a flat rate of corporation tax, currently 19% and due to drop to 17% by 1 April 2020. Due to the increasing divergence between income and corporation tax rates, many businesses are choosing to incorporate and trade as a company. Any post tax profits extracted from the company by way of a dividend are likely to be subject to additional tax charges however if you can afford to leave the profit in the company then the current rate of corporation tax is appealing. There are many issues to consider before incorporating and advice should always be taken ahead of time.

The correct approach will depend on your individual circumstance. If you feel that 2018/19 is likely to be a more profitable year than normal you should seek advice early or ensure that the correct strategy is in place to manage your tax liabilities.

Scott Greig is a senior manager in our Cupar office who advices a range of farms and estates across Scotland. He can be contacted on 01334 65044 or at scott.greig@eqaccountants.co.uk.

Alternatively, you can contact any member of our EQ Agriculture team via agriculture@eqaccountants.co.uk or by calling our Forfar (01307 474274) or Cupar (01334 654044) offices.