In April last year, the Government announced plans to overhaul the way trading income is taxed.
If enshrined into law – and that is looking to be highly likely – the Basis Period Reform will affect organisations or individuals with a trading income that is subject to income tax including sole traders and partnerships, which make up the bulk of farm enterprises in the UK.
What is more, there is a real risk some farmers could face increased or accelerated tax burdens.
The plans include a move away from taxing businesses on their own basis period – in effect their own financial year – to a system where everyone is taxed in line with the current tax year, the 12 months up to March 31st or April 5th.
These proposals are being introduced to pave the way for the government’s Making Tax Digital for Income Tax agenda, which requires all businesses to report financial performance at the same time and is due to be introduced in either 2023/24 or 2024/25 depending on how quickly it can be rolled out.
How will the plans affect farmers?
There are some practical issues around farmers having to submit tax returns for March 31st or April 5th. Many farmers will be caught up in lambing or calving during this time, leaving little time for tax calculations and meetings with accountants.
However, Ian Parker, a director here at Whitley Stimpson Ltd and an agricultural accountancy expert, says there are larger issues at stake for farmers to consider.
“Although the changes proposed by HMRC might not be so onerous for a lot of small businesses, the way many farm incomes are generated means there is a real risk of an increased tax burden for farmers, which could impact significantly on cashflow.
Arable farmers, for example, sell their crops later in the year and then also receive support payments in December, which means there is a lot of income during these months, but for the remaining nine or 10 months in the year, they may well make a loss.
If a farm’s current accounting date does not conform to the tax year, then profits will need to be apportioned across two accounting periods. Depending on a business’s accounting date, that could lead to overlap profits where several months end up being taxed twice in the same year which accelerates when tax is due for payment. Given the way farm payments are structured, that could have a devasting impact on cashflow and the viability of the business.”
Changing accounting dates
One solution might be to alter your accounting date in line with the tax year in advance of the changes, and on the surface this might sound attractive. However, Ian warned this is also not without pitfalls.
“Changing your accounting date is an option, but farm businesses need to tread carefully,” he said.
“If a business extends their accounting period to bring it in line with the tax year, it could be taxed twice for the period of the extension and so careful planning is required as to identifying the optimum time to change. Although this means they will eventually get the amount they have paid twice back, it could still impact negatively on the cashflow of the business, making farming life that much harder.”
Although different types of farm business will be affected differently by the proposed changes, having professional support could be the difference between a smooth transition and paying significantly more than you owe.
To speak to us about how Basis Period Reform might impact your business, or any other tax related agricultural issue, get in touch with Ian Parker on (01295) 270200 or email IanP@whitleystimpson.co.uk.
The article is covered in our Agricultural Spotlight – click the link to read the full magazine, which keeps farmers up to date with the latest accounting changes and challenges.