The end of the EU Common Agricultural Policy in the UK is set to bring huge changes to the farming sector. Now is a great time to review your plans for the future of your agricultural business, and think about how you will achieve them. Here, we look at the tax advantages of partnerships and why the timing of big business decisions is so important.
There are several questions that could form the basis of your business review, such as:
What is your current business structure?
Is this the optimal structure to achieve your aims? Or could this be the time to introduce a partner to the business? For example, for the family farm to bring in the next generation.
Do you plan to invest in new equipment? If so, when is the best time to spend on capital items?
Potential tax advantages of a partnership
A potential plus point of introducing a partner to the business might be lower tax, as partners are taxed only on their share of profits. A lower income may also fall within a lower tax band.
The timing of changes in business structure can have significant tax consequences and any decision should be carefully considered within the context of the business as a whole. We can help you to determine when would be the most appropriate time for your business.
Farmers’ averaging is a planning tool which can help keep tax bills down during periods of fluctuating profits. Averaging may be particularly relevant in light of the impact of drought on crops and livestock this year. The impact on Class 4 National Insurance contributions should also be factored in.
Traditionally, averaging spanned two years, but it is now possible to average over different periods – from two or five years, or not at all. There are rules to be followed and averaging is not open to farming companies – only sole traders and partners. Not every business can use five year averaging: eligibility is assessed by running the numbers through a ‘volatility test’.
The timing of exits or entrances to a partnership will also have repercussions. Averaging claims cannot be made in the year a partnership commences or ceases. This rules also applies to partners leaving or joining an existing partnership. The impact of averaging will not necessarily benefit every member of the partnership so it is important to monitor the tax position of each individual partner.
Capital expenditure and allowances
We recommend you also think about liquidity when reviewing your future plans. Getting the timing of capital expenditure and claims for capital allowances right can affect taxable profits – and the size of your tax bills. It can also affect averaging claims (as averaging is calculated on profit after capital allowances). Whatever the end of CAP brings, a solid, overarching plan for the next few years is likely to pay dividends.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.