Business Clinic: Will early BPS cash affect my tax bill?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s experts can help.

Andrew Robinson, partner and head of agriculture at Armstrong Watson, advises on how early payments from the Basic Payment Scheme will affect tax.

See also: Business Clinic: What tax relief can I get on my new dairy complex?

Q: Our partnership prepares accounts to 30 September each year, and normally we have an annual receipt of Basic Payment Scheme (BPS) in December in each set of accounts.

In the year to 30 September 2022 we will have the 2021 BPS payment received in December 2021 and 50% of the 2022 payment received in August 2022.

Our management accounts for the year are showing a higher profit for the year, partly as a result of this extra BPS. Is there anything we can do to avoid a bigger tax bill next year?

A: The recognition of BPS for tax purposes is more complicated than just recognising it when it is received into your bank account.

HMRC, in consultation with accountancy bodies, issued guidance on this point in 2005, shortly after the introduction of the single farm payment scheme.

This guidance gave the choice of two accounting policies: 

• To recognise the income as soon as the claim is made in May each year
• To recognise the money on 31 December each year.

This was because until that date a farmer could fall foul of cross-compliance regulations and not receive the full amount. 

A business is free to choose either policy as long as it applies it consistently.

Therefore, if your business has not recognised BPS until December each year, you can defer recognition of the interim 2022 receipt in the September 2022 accounts, even though the money was in your bank.

 In previous years, when BPS payments were regularly received late, it meant including BPS in accounts before the money was received.

The benefit of either of the above accounting policies is that there will always be one BPS claim in each accounting period.

This should prevent the fluctuations of profit that would occur if BPS was recognised in accounts when received. 

There is uncertainty over whether HMRC will change its approach in 2024 when BPS receipts are delinked, and it is no longer necessary to occupy land or meet cross-compliance conditions.

Equally, we do not know when income from the replacement schemes, such as Environmental Land Management or Sustainable Farming Incentive, will be recognised for tax purposes.

The general rule is they should be recognised as soon as all the conditions of the scheme have been met.

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