Top tips to minimise January tax bills
Tax bills are due for payment at the end of January 2013; which will pile more pressure on many farming businesses. There are, however, useful ways to minimise those bills, says Andrew Arnott.
With the 2012 harvest completed, farmers’ thoughts may well be turning to the completion of their tax returns for the year ended 5 April 2012. The deadline for submission of these returns is 31 January 2013.
For the majority, these tax returns will include the results of their 2011 harvest, which for most arable farmers was a very good one.
The difficulty they now face is that they will have substantial tax payments due in January and July next year, based on the better 2011 harvest at a time when their cashflow is severely affected by the poor 2012 harvest and sfp cheques worth about 8% less than in 2011.
The payments due in January include a balancing payment of tax for the year ended 5 April 2012 (payable by 31 January 2013) and two equal tax payments on account for the year ending 5 April 2013 (payable by 31 January 2013 and 31 July 2013).
Reduce payments on account
The tax payments on account will be based on the year ended 5 April 2012, which includes the good 2011 harvest. If a farmer expects not to do so well in the following year, a claim can be made to reduce these payments if a taxpayer believes their tax liability is going to be less than the previous year.
A reduction in payments on account is claimed on the tax return by showing the revised payment you have calculated on reduced profits.
This relies on good management information being available on which to calculate the expected reduction in profits.
Anyone claiming a reduction in payments on account needs to take great care that the reduced profit figure has been reached in a logical and reasonable way as HM Revenue & Customs (HMRC) can ask to see the figures on which the claim is based.
If the reduced payments prove to be less than they should have been then HMRC will automatically charge interest on the difference and, if they feel the reduction cannot be justified, they can also seek penalties.
Sideways loss relief
If the 2012 harvest is so poor that a farmer (who is a sole trader or a partner in a farm partnership) makes a loss, then in the same way as any other trading business, the farmer can offset that loss against his or her other income from any source in the same year or the previous year.
This is known as sideways loss relief. There is a proposal to cap it at either £50,000 or 25% of an individual’s income (whichever is greater) from 6 April 2013. But no draft legislation has yet been published so loss relief can at least be claimed in the normal way up to the year ending 5 April 2013.
Averaging
Farmers, unlike most other trading businesses, may also average their results for tax purposes, by adding together two years’ results. This means they are taxed on half the total for each of the two years, with a loss being treated as a nil result.
To use this relief, the difference between the results for the two years must be at least 30% of the profits of the better year. Relief is also available on a tapering scale where the difference is between 30% and 25%, with no relief available if the difference is smaller than 25%.
From a practical point of view, claims for both sideways loss relief and averaging can only be made when submitting the tax return for the year ended 5 April 2013, so it is important that this tax return is completed and filed with HMRC as soon as possible after 5 April 2013.
In summary, farmers face a large balancing payment of tax in January next year, which can only be adjusted downwards following submission of the tax return for the year ending 5 April 2013, with claims for sideways loss relief or averaging, or both.
Tax pointers
- Payment on account portion of 31 January bill can be reduced if it is expected that the current year will be less profitable than previous year
- Good information needed to accurately assess the reduction in expected profits
- Sideways loss relief can be used to reduce tax bill by offsetting income from one source against another in the same or previous year
- After year ended April 2013, it is proposed that sideways loss relief will be capped Profits can be averaged if there is at least 25% difference between the results of two years
Andrew Arnott is a Partner with chartered accountant Saffery Champness and a member of the firm’s Rural Business Group.