Top Tips for Keeping the Tax Man at Bay

Our top tip is to ensure that you have the most suitable business structure and that income is shared efficiently; not only between spouses, but also with other working adult family members where appropriate. 

DO’S

Partnership structure can be very flexible:

• Profits can be shared across several family members to take advantage of each of their personal allowance and basic rate income tax bands

• Losses can be set against non-farm income (e.g. employment or pensions)

• Younger partners can pay inexpensive class 2 National Insurance Contributions to build future entitlement to state pension

• Sharing profits across several family members can reduce or avoid higher marginal tax rates

Farms are valuable, and farmers are understandably concerned about the financial risks (e.g. divorce) of bringing family members into partnership. Those risks can be managed by keeping the farm property outside the partnership business, or by putting in place a suitably tailored partnership agreement and land capital accounts where there is substantial value within the business.

We discourage farmers from spending money (e.g. on new machinery) just to save tax. However, there are occasions when investment is needed is needed in the business, and some forms of investment is needed in the business, and some forms of investment can achieve generous tax relief.

• 100% Annual Investment Allowance is currently available on up to £1m of annual expenditure; not only on machinery, but also on functional fixed plant such as silos and slurry stores. Costs of (e.g.) concrete for those assets need to be clearly distinguished in the reco0rds from similar purchases for new buildings or for repairs.

• There is little tax relief on new farm outbuildings (Structures and Buildings Allowance is only 3% per annum), but costs of electrics, plumbing and other functional elements can qualify for 100% Annual Investment Allowance. These costs need to be identified separately from the building expenditure; we recommend having them separately identified in the invoicing and/or contact documentation.

To qualify for capital allowances, the legal liability to pay for an asset must have arisen by the year end – this usually means that the asset has to be on-farm (but it also has to be in use by the year end if purchased on HP). Having an order in with the dealer (even if invoiced) is not sufficient. Please beware also that any grant on the investment must be deducted form the cost eligible for capital allowances.

Occasionally, an individual might be entitled to a chargeable event gain on encashment of an insurance policy or, less commonly, a state pension lump sum. These have special income tax rules and it is sometimes advantageous to time them in a year when other income sources are lower. Please speak to us after you have found out your entitlement and before you commit to drawing it.

Although basic rate taxpayers usually do not see any reduction in their self-assessment tax liabilities, pension contributions and have several income tax advantages:

• HMRC pay a tax rebate directly into the pension scheme, boosting your investment. This rebate amounts to one-quarter of your pension payment

• Higher rate taxpayers also benefit from a reduction in their self-assessment tax (usually another quarter)

• Making pension contributions reduces the income that is counted for both tax credit purposes and high income child benefit charge (HICBC). The effective tax relief on pension contributions can be very high in situations where there is a tax credit or HICBC advantage.

Please be aware that an individual’s payments into pensions in a tax year must be restricted to £2,880 or 80% of earned income, whichever is greater.

DONT’S

Tax legislation has mushroomed over the years and many anecdotal tax planning ideas no longer work; for example:

• Property income is defined in tax legislation, and it must be taxed on the person who has the legal right to it. For a different person to be taxed on (e.g.) holiday letting income, that different person must have a tenancy or a licence to occupy the property.

• Be wary of agreeing to let out a property at an under-rent on condition that the tenant undertakes major improvements. In such cases, the landlord is taxable on the value of the improvement of work

• Special care is needed in considering whether a project is capital or repairs. Google Maps (which often provide clear satellite images at a selection of different dates) and on-line planning application records provide rich sources of information that are instantly available to HMRC if they choose to check them

Retrospective Planning 

After the accounts have been prepared, there are still measures which will often help reduce tax liabilites or precipitate a larger repayment

• Marriage allowance – if your spouse is not using their full personal allowance they can transfer part of it to you, so long as you are a basic rate taxpayer

• Farmer averaging – often considerably reduces or delays tax

• Where results have fluctuated over the years, we can sometimes manage taxable income at an optimal level with a combination of capital allowance restrictions, 5 year farmer averaging and optimal loss allocations. The interaction between these reliefs requires careful planning. It should also be noted that these reliefs are not available to taxpayers preparing account on the ‘cash basis’ which we recommend that most farmers avoid).

If you require any further assistance, please do not hesitate to get in touch.