Getting a better understanding of your tax liabilities is a fundamental tool in improving the financial success of your farm or agricultural business.

As we highlighted in our previous blog, it’s vital that you have a clear focus on maintaining positive cash flow and have profitability built into your farm’s business model.  And one of the key ways to reduce your costs and increase profits is to be on top of your tax and applying a consistent tax strategy for the business.

So, what impact does tax have? And how do you plan ahead to minimise the effect of tax costs on your farm’s profits?

Income tax and corporation tax

One of the unavoidable aspects of running any business is the need to pay the required amount of tax to HM Revenue & Customs (HMRC). And the farming sector is no different.

The way you’re taxed on your income will vary depending on the size and nature of your farming business, and the legal structure you’ve chosen for your business.

There are also specific tax exemptions for farming businesses that can help you maximise your tax efficiency, depending on your business structure.

  • Farmers’ averaging – if you’re a self-employed farmer, you could be eligible to average out your profits in consecutive years so you pay your income tax on an average figure, minimising the impact of fluctuations in profits over time. (From April 2016 5 years can be averaged).
  • The herd basis – if you keep livestock, you can elect to apply the herd basis, where your breeding herd is treated not as normal trading stock, but as a capital asset in the farm business. This could help your tax costs when working out profit and losses over the year, together with benefits if you scale back or cease farming.
  • Losses – most losses you incur as a farming business can also be claimed against other income you’ve generated, which helps you to lower your tax bill even further.

PAYE and payroll

Another area to consider is payroll and the impact of hiring employees. As soon as the farm starts employing additional workers, you’re required to register for Pay As You Earn (PAYE) tax with HMRC.

Every time you run your payroll, you have to make the required deductions from your workers’ wages and pay their PAYE and National Insurance contributions to HMRC.

It’s not a direct tax on the farm’s profits, but it is part of your financial management that can impact on cash flow, admin time and the overall impact of dealing with your financial affairs.

Land, property and capital gains

Two of your key assets as a farming business will be your land and the property on that land. And how you develop, sell and gift that land and property can have complex tax implications.

  • Developing land – if you’ve earmarked part of the farm for development land then you need to ensure it qualifies for entrepreneurs’ or rollover relief to keep your tax costs down on any sale.
  • Gifting land to your family – as your children get older, you may want to gift land to them for building a house. But it’s important to think about the tax consequences and the impact of inheritance tax and capital gains tax on this gift. Make sure the tax implications have been thought through well before you seek planning permission.
  • Letting out land – if you let out any of your land to tenants, you’ll need to ensure that you qualify for agricultural property relief. You may continue to own and live in the house on your land but consider letting out the rest of the farm to another farmer. There are tax consequences of this that you’ll need to pay serious attention to – including an impact on inheritance tax.

Talk to us about improving your farm’s tax efficiency

As you can see, there are plenty of ways in which you can use tax planning to bring about a positive impact on your farm’s end profits. But there are also many ways in which a poor tax strategy can result in you missing out on incentives and tax reliefs that you’re eligible for as a farming business.

The best way to maximise the tax benefits (and minimise your tax headaches) is to talk to a professional tax adviser who specialises in working with farming businesses just like your own.

At Saint & Co, our Farming Services team work with you to make sure your tax is creating profits, not cash flow nightmares. We’ll help you to plan ahead, create a clear tax strategy and maximise the reliefs and tax incentives that are open to you.

If you’re looking to get control of your farm’s tax issues, please do come and have a chat with us.

Contact your local Saint & Co office and arrange a meeting with one of our farming business specialists.

You can find out more about our farming services here.