Farmers could make use of the new five-year tax averaging to help fund new machinery purchases and reduce tax liabilities in the current year, according to accountant Old Mill.
Although many farming businesses are under extreme financial pressure due to low commodity prices, and are likely to be suffering from very tight cash flow, making use of new tax rules could prove extremely beneficial.
“Understandably most farmers will be tightening their belts this year and rigorously questioning whether they need to make any equipment changes during the current difficult trading conditions,” says senior director Mike Butler.
“But by using five-year tax averaging they may be able to generate tax refunds on previous, more profitable trading years, and in doing so free up cash to invest in the farm this year.”
From 6 April 2016 farmers operating as sole traders or in a partnership will be able to average the tax year 2016/17 with the previous four tax years.
“Most farmers will have suffered a serious downturn in profitability in 2015/16 and potentially 2016/17 – but averaging back will merge that with more profitable years,” says Mr Butler. “Any profits brought forward from previous years will generate tax refunds, which could ease cash flow during the current difficult period.”
However, there is then the danger that producers will face an Income Tax liability this year as a result of bringing past profits forward. “In that situation, it could present an ideal opportunity to invest in the farm, and take advantage of the 100% Annual Investment Allowance for 2016, potentially slashing your tax bill to nothing.”
The AIA for 2016 is £200,000 – so investment in eligible plant and machinery can be completely written off against Income Tax up to that threshold. Over and above that level, investments are typically written down at 18% a year.
Of course, there is never any circumstance where buying machinery can be advocated purely to save tax, he warns. “But a lot of businesses need to keep their machinery up-to-date or else they will soon become exposed to excess farm repairs and lack of reliability. If a machine is going to be changed then understanding how to get the most tax relief out of it will make all the difference.”