There are now less than two months to go until the end of the 2014-15 tax year, and businesses should plan carefully to utilise annual tax allowances and reliefs to their maximum.
Many farming businesses have accounting year ends of 31 March or 5 April and for businesses considering expenditure on capital equipment it could be worthwhile ensuring this expenditure is incurred in the current year. The current 100% Annual Investment Allowance (AIA) on qualifying capital expenditure is £500,000 and under current legislation this will remain until 31 December 2015 when it falls to £25,000.
Care should be given to expenditure already incurred in the past accounting year, and also to consider the business’s accounting date which will affect the amount of relief available.
Be aware that not all capital expenditure qualifies for relief at 100%, different types of expenditure may only qualify for relief at 18% or even 8%.
Timing of expenditure is key, relief is only given when the obligation to pay becomes unconditional.
Similarly, consider deferring the disposal of equipment until after the year-end as the proceeds may generate an unwelcome tax liability.
The amount and value of stock held at the year-end can have a significant impact on profits and tax liabilities. The stock adjustment is necessary to ensure that costs incurred before the year end but which will not give rise to income until a later period, are carried forward to set against the income when it arises.
Stock should be valued at the lower of cost or net realisable value. For cattle, HMRC accept 60% of market value as a deemed cost, and for sheep and pigs a 75% value is used by most businesses. This method is more straightforward for home-reared animals, however, there are other methods including actual cost of production and net realisable value if a profit is not expected to be made. Actual cost of production can result in valuations considerably less than deemed cost, so there is an opportunity to reduce the value of closing stock to bring down the tax bill.
The timing of sales could be crucial in determining the period in which the profit will be recognised. If high profits are expected in the current tax year, delaying the sale until after the year end will result in the value being reduced by 25% in the accounts, with profits delayed until the following year.
Accrue for expenditure
Businesses should consider bringing forward any business expenditure which it is intended to incur after the year-end, for example maintenance of buildings and yards, in order that tax relief may obtained a whole year earlier.
Similarly, farmers should think carefully about the timing of any sales made around the year-end. Profit is only recognised when the sale takes place, so simply deferring a sale until after the year end can reduce current year profits whilst not significantly affecting cashflow.
To assist cashflow, farmers may consider the likely profits for the current year and whether tax payments on account can be postponed. With milk prices at their current level it may be that profit levels will fall and the tax payment due on 31 July can be reduced.
The clawback of Child Benefit already paid will apply where one individual in a household has an income in excess of £50,000. If possible, a husband, wife and partners should equalise income between them, to ensure any Child Benefit restriction is kept to a minimum.
Restriction of loss relief
If a trading loss is anticipated, when considering the most effective use of this note should be taken that relief on trading and certain other losses is now restricted to the higher of 25% of net income and £50,000 a year for active participants and £25,000 for non-active participants.
Capital Gains Tax
The annual exemption for the 2014/15 tax year is £11,000 (rising to £11,100 in 2015/16). Each individual therefore is able to make a Capital Gain of this amount without incurring any CGT liability. Spouses may wish to consider transferring an interest in an asset to each other prior to any disposal to ensure both Annual Exemptions are maximised, which could save tax at 28%.
Taxpayers may wish to consider their pension funds and if cash is available, make additional contributions into these funds before 5 April, minimising any Higher Rate Tax.
If you would like any further information on any of the points raised in this article, please don’t hesitate to contact Malcolm Peters at email@example.com or on 01872 271655.