“/>Seamus McCaffrey, accountant, Omagh
A limited liability company pays corporate income tax nine months after the balance sheet date. Timely tax planning can support cash flow management.
Relevant tax planning options for sole proprietorships and partners are: Since profits fluctuate, it is possible to claim “averaging”. Averaging is not available to limited liability companies or to people engaged in agricultural contracts or transportation.
With effect from and including the 2016/17 tax year, farmers have the option of generating the average profit over either two or five years, whichever is more advantageous. To be eligible for averaging, farmers must pass a volatility test. An average claim must be submitted to HMRC no later than twenty-two months after the end of the second assessment year.
The normal basis for valuation of livestock is the lower of cost or net realizable value. If the value of the livestock increases from the beginning to the end of a billing period, a tax must be paid on the increase. However, a farmer who acts as a sole trader, partnership or limited company and has a production herd of cows, sows, ewes or fish can choose the herd base in writing. The main advantage of the herd base is that annual increases in the value of the production herd are not taxable. In addition, the final disposal of the stove is tax-free if it is not replaced within five years. There are additional accounting requirements, but a herd-based choice can be very beneficial in managing tax liability.
If a farmer’s son or daughter is employed on the farm and is taking a full-time course in agriculture, payments up to £ 15,480 can be made to the employee for the current academic year, tax and insurance free. In addition, the payment is an allowable deduction in determining the farmer’s tax liability.
This is an attractive incentive to bring new skills to farming and the cost is tax-allowable if the conditions are met.
If the agricultural business makes a loss, that loss can be treated in two ways: the loss can be carried forward indefinitely and offset against other agricultural profits, or the loss can be carried over to other taxable income resulting in a tax refund.
To successfully receive a tax refund, the farmer must demonstrate that the farming business is on a commercial basis and is not just a hobby. In addition, there are restrictions on the amount of loss that can be carried forward.
If the farmer is unable to pay the tax due on January 31, an agreement can be reached with HMRC on the payment deadline, provided tax returns have been filed.
The claim must be made before the due date in order to pay the tax. If the agreement is adhered to, no penalty will be charged, but interest will be payable.
These are examples of tax planning options that will help you manage your tax liability. In order to be able to use these possibilities, the figures for the current year including the COVID funds received must be available and there must be regular contact with the farmer’s accountant.
For more information, call (028) 8224 1515.