A Good Average

Dec 14, 2022

Christmas is coming, the goose is getting fat, please put a penny in the old man’s hat.  

Or not, because Christmas is swiftly followed by January, and we all know what that means … those dreaded January tax bills. The old man is going to have fend for himself this year, I’m afraid. 

This is particularly the case currently as the price of wheat meant a lot of farmers, particularly the big arable boys and girls, had a cracking year last year. Profits were up and as tax bills will be based on profits in the 12 months to April 5, 2022, that might make for some eye watering sums.  

So, is there anything that can be done to smooth those tax bills out and make them more palatable in the year’s most depressing month? 

Well yes, actually, there is!  

Averaging profits 

If you’re concerned about facing a crippling tax bill that essentially penalises you for being good at your job, you may be able to average them out over the past two or five years, to make your tax burden less bothersome.  

The regulations governing this were introduced in April 2016 and unsurprisingly, they come with some conditions. For example, to average your profits over a five year period, the average of the previous four years’ profits and the fifth year’s profits cannot be in within 75% of each other.  

The same rule applies for average over two years – the current year’s profits and the previous year’s must not be within 75% of each other.  

If a farmer makes a loss in any of those years, this will be treated as zero for tax purposes, but the losses remain available for standard tax relief.  

To qualify, averaging claims must be made within 12 months of the normal self-assessment filing date for the latest year to which the claim relates. 

Income tax only  

Although averaging is undoubtedly a good way to make tax more manageable, it does have some restrictions.  

Firstly, it applies to income tax only, not corporation tax, so isn’t available to incorporated farm businesses. Partners in a farming partnership can claim averaging pro rata to their share of the business.  

Initially, new entrants into agricultureal cannot access the scheme as it requires a minimum of two years’ trading history, and it cannot be used for non-farming income streams such as diversification projects, rental incomes, or renewable energy schemes.  

But if you meet the criteria, averaging can be an effective way of spreading out your tax bills and perhaps bringing you enough peace of mind to enjoy the festive season.  

Maybe you can afford to give the old man a little loose change after all! 

If you are expecting a large tax bill in January and you think average might be one way to deal with it, why not discuss it with our experts? Get in touch on (01295) 270200 or email ianp@whitleystimpson.co.uk. 

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