Despite a post-Brexit pick-up in prices, many farmers are having to cope with much lower subsidy income and poorer trading conditions generally and so will be facing lower profits for the 2016 / 2017 tax year than they experienced in 2012 / 2103.
If that is the case and the higher profits in 2012 / 2013 meant that significant tax bills arose, then the introduction of farmers’ five-year averaging of profits from this year may give welcome relief to those who found the previous two-year averaging relief restrictive.
The 2016 / 2017 tax year relates to those sole traders or partnerships who have a financial year end which ends in the year to April 5 2017, e.g. November 30 2016 or March 31 2017. The profits in question are the firm’s taxable profits after claiming capital allowances.
Each farm will now need to keep a note of their long-term taxable profit history and review this on an annual basis to determine whether any tax can be saved. Tax savings may arise because the averaging exercise takes out profit previously taxed at higher rates, allows the reinstatement of personal allowances or fully utilises previously unused personal allowances.
The savings can be substantial, not only when compared to the pre-averaged tax bills but also compared to those from two-year averaging.
Examples of farmers who will benefit will be those who have experienced a very high taxable profit in one year followed by a good year then three poorer years or, say three good years followed by two poor years.
Taxable profits on farms can vary significantly (which is why this relief is uniquely available to farmers) so each farm should carry out this exercise.
As an illustration, if profits were:
- £115,500 for 2012 / 2013
- £65,000 for 2013 / 2014
- £26,000 for 2014 / 2015
- £10,000 for 2015 / 2016
- nil for 2016 / 2017
The farmer would save £5,800 in tax by electing to five-year average the profits, compared to the bill using the previous two-year averaging relief.
Not all results can be five-year averaged. Profits have to meet the volatility test which can be met in one of two ways. Either one or more of the five years under consideration is nil (or a loss) or the average of the previous four year profits when compared to the fifth year is 75% or less than the other. It is then possible to make an averaging claim.
Bear in Mind
Only farming profits are subject to averaging. Profits generated from, say, cottage rents or wind turbines, must be excluded from the calculation.
An averaging claim cannot be made in the year of commencement or cessation. This includes individual partners joining or leaving a partnership.
While circumstances such as the death of a partner cannot be controlled, other retirals or admissions to partnership should be monitored to ensure the five-year averaging calculation is not adversely affected. Losses in a year are treated as being nil profits for the averaging calculation, so that the loss can still be utilised in the normal way.
If you would like to discuss the potential benefits and impact on your business, call David Walker on 01383 628800.