Tax reform warning for those using farm profit averaging

The government’s plans for transition to a new “basis period” accounting system is creating uncertainty around the use of tax averaging by farming businesses, alongside a warning of the possibility of those returns being taxed twice.

The reform will change the way trading income is allocated to tax years. It means that sole traders and partnership will be taxed on profits arising in the tax year, rather than those arising in their accounting year which ends in the tax year.

It will affect partnerships and sole traders that account to a date other than 31 March or 5 April and is likely to mean an acceleration of tax payments for those businesses, says accountant Martyn Dobinson, a partner at Saffery Champness.

Consider averaging for cereal farms in 2020-21 tax returns  

With average cereal yields for 2021 up on last year, Mr Dobinson says making use of the averaging provisions could be beneficial for growers preparing their 2020-21 tax returns.

See also: Five-year profit averaging proving more beneficial than expected

However, clarity is yet to be given on how the use of averaging further ahead will be affected by basis period reform, in particular in the transitional period before the new system starts in the 2024-25 tax year.

Mr Dobinson urges caution: “As yet, it is difficult to know precisely how the basis period reform will affect important elements of tax planning for farmers, such as use of losses or averaging, particularly during the transitional period to the new basis, and we look forward to receiving more detail in due course.’’

See also: Next step of making tax digital delayed by year 

Averaging allows farm profits to be averaged over either two consecutive financial years or, through a measure introduced in 2016, over five consecutive years.

However, in the transition to the new basis period of taxation, some profits could be taxed twice, says Mr Dobinson, although overlap relief may be available, and there may also be the option to spread any additional such taxable profits over five years.

Mr Dobinson says many businesses choose a year-end other than the tax year for genuine commercial reasons. He cautions that changing the accounting year-end to coincide with the tax year could cause additional administrative burden.