In a previous Agricultural Spotlight edition, we’ve talked about the forthcoming Basis Period Reforms and how these could impact disproportionally on farmers.
This is particularly the case for livestock farmers, many of whom will be in the middle of lambing or calving, or both, at the end of the tax year – either March 31st or April 5th – which are the dates the government want everyone to fall in line with.
So, with that in mind, we felt the topic was worth revisiting as transitional arrangements are coming into play in the current tax year, and the rules will take full effect in the 2024/25 tax year.
What is Basis Period Reform?
Your Basis Period is essentially your business’s financial year, which for many companies, particularly farmers, is different to the standard tax year.
Traditionally, this has helped many farmers out. It has enabled them to have their year-end, and all the work that incurs, at their quieter times of the year.
But as part of the Making Tax Digital for Income Tax agenda, the government now wants this to change, to bring all businesses in line with the tax year so they all report their financial performance at the same time.
How will the plans affect farmers?
As well as placing extra burdens on farmers trying to manage lambing and calving, changing the Basis Periods could raise further, more troublesome issues, specifically in relation to how farm incomes are generated.
According to Ian Parker, director of Whitley Stimpson and agricultural tax expert, there is a risk of increased tax burdens for farmers undergoing the transition to the new yearend date, which could put a strain on cash flow.
This is because during the transitional period, farmers will be taxed on the 12 months to their current yearend, and then on the months from their yearend to the end of the tax year (the transitional tax component).
An example might would be a farm business with a yearend on June 30th. The business would pay tax on the 12 months of trading profits to June 30, 2023, and then on the trading profits from July 1st, 2023, to April 5th, 2024.
With the entire burden coming due at the same time, this could constitute a considerably larger tax bill than normal, placing a hefty burden on the farmer affected.
“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. Given the way farm payments are structured, that could have a devasting impact on cashflow and the viability of the business.”
Planning is Key to Negotiating the Changes
Ian added that with the transitional component of Basis Period Reform beginning at end of this tax year, farmers with a yearend that is different to the tax year need to start planning now.
“It’s vital farmers discuss the best way forward with their accountants. Failure to do this could lead to huge tax bills that in the worse cases, could put them out of business. Yet with a bit of planning, such a scenario can be managed and avoided.”
For more information on Basis Period Reform, contact Ian Parker on (01295) 270200 or email firstname.lastname@example.org.