The typical problems of farm accounting and how to avoid them
You didn’t get into farming to do the accounting. And, as we’re sure you already realise, there are many nuances to running a farm which impact accounting in ways that simply do not occur in other industries. So it’s advisable to have an experienced agricultural accountant at your service to help you run your farm in the most financially efficient and profitable manner.
From qualifying for subsidies to tax-efficient purchases of machinery, there are many pitfalls to avoid.
1) Missing out on changing tax breaks
When businesses purchase certain types of asset or equipment, they may benefit from various tax reliefs. As a farmer, you’ll likely invest in more machinery than the average business, and so understanding which of these tax breaks are relevant to you is particularly important.
The annual investment allowance (AIA) is a long-established mechanism for giving tax relief on assets which are used to maintain your business. For a farmer these could include tractors and combines, among other things. The current AIA allows for £1M of expenditure a year and runs to 31 March 2023.
The Government also temporarily offered super-deductions of 130% on capital purchases made between 1 April 2021 and 31 March 2023, potentially making it attractive to have brought forward certain expenditure. However, whilst AIA can be claimed by partnerships and LLPs, they can’t claim superdeduction.
Working with a switched-on accountant can help you plan to make use of all available tax breaks as and when they arise.
2) Getting ahead with better record-keeping
It is said that change is the only constant, and that is certainly true on a farm – be that fluctuating heads of livestock, new uses of land, or the depreciating value of assets. You’ll have a rough idea of much of this information, but detail is important and it can be easy to sacrifice during a busy week or month. Record it all! Because everything has a value in your accounts.
Good record keeping may allow you to claim for subsidies. It may facilitate you offsetting losses in a bad year against future profit in a good one. And it will simply help you make informed decisions.
3) Cashflow forecasting
Farming is a seasonal business, so you would not expect smooth profit and loss throughout the year. Understanding the months when more investment is required and those when the cash will roll in is essential for operations, not to mention your peace of mind.
Again, you will probably have a rough idea of the way things fluctuate, but this will only take you so far. If you have not formally made cashflow forecasts before, take a look back at your previous years’ records to anticipate expenditure for the coming 12 months. When you have this information, you can use it to identify any gaps in funding and find solutions before you feel the crunch.
4) Undervaluing your sweat labour
It can seem the path of least resistance to roll up your sleeves and just get on with all the jobs that need doing around the farm. Sometimes you may have no alternative. But from a business perspective, it is important that you properly recognise and value this work.
While it may be necessary to put in the hours, even if you were not to pay yourself proportionately, you need to understand how much it is worth to the farm. Knowing this can help you budget and build sustainable operations, adding value to your business.
Other factors
The nuances to farming accounting do not end there. There are special considerations around inheritance tax, capital gains tax and rule changes brought about by Brexit. If you would like a conversation about getting accounting support for your farm, please do not hesitate to get in touch. Our Agri Partner Mark Gibson leads a team with specialist skills and knowledge in this area. Contact Mark at mgibson@thomsoncooper.com or call 01383 628800.