Tax concessions to help deal with volatility

A key proposal in the Chancellor’s recent Budget was to allow farmers to benefit from tax averaging over five years, instead of the two years that are currently allowed.

And while only those that suffer from the most profit volatility are eligible to take advantage of the measure at present, one of the two options for reform proposed is to provide automatic averaging for a fixed period of five years. There would be no requirement for an annual claim, but farmers would need to opt in for a full five years and there would be no “volatility test”.

The current two-year system involves a volatility test to identify eligible farm businesses. Farmers only qualify for averaging if the difference between profits in a good year and a bad year is at least 70 per cent. The other proposed option for change, is simply to extend the current system to five years, with eligible farmers able to decide each year if tax averaging would be beneficial to them.

HMRC is seeking the views of farmers, agricultural financial advisers and farming organisations on the proposals before a public consultation ends on September 7.

The new system will come into force from April next year.

Environment Secretary Elizabeth Truss said: “Food and farming are cornerstones for our economy, contributing more than £100 billion a year. Our plans around tax averaging will help our farmers better plan for the future and invest to further improve their competitiveness.

“We know it is important the tax system reflects the market realities that farmers face. Extended tax averaging will be particularly helpful for our world-leading dairy industry where we have seen recent global price volatility.”

The National Farmers’ Union has been calling for an extension to tax averaging for some time.

Michael Parker, the union’s head of tax, said: “The NFU is pleased that an enhanced form of farmers averaging is being considered to help with mitigating the effects of volatility. We had envisaged that this would allow farmers to average over a two, three, four or five year period rather than the current proposals which seem to focus solely on a five year period. We will therefore be engaging with our members about the proposals during the consultation period and encouraging farmers to have their say. We would be very interested to hear readers views on this consultation.”

Greg Ricketts, director at Andersons, the York-based farm business consultants, said he believed tax averaging presented a real opportunity to manage the output price volatility which is having a massive impact on farm businesses.

“The last few years illustrate why averaging could be beneficial with higher output prices for some sectors during 2013/14, for example, dairy, leading to increased profits, followed by a 30 per cent reduction in milk price since August last year, effectively leaving dairy businesses with higher tax bills to pay when output price has fallen below the cost of production.

“We believe output price volatility is now a feature of the farming industry and here to stay for the longer term. Any assistance in managing that volatility has to be welcome. Ultimately the government will receive the same level of tax revenue, but this will be averaged out over a period of years and should reduce the fluctuations in the level of payment due.

“Over time the proposals appear to represent a win/win situation for both farmers managing cashflow within current economic conditions and the government in collecting tax revenues.”

David Raspin, manager for Townends Accountants LLP in Goole, added: “Extending the averaging period from two to five years should further help to ensure that allowances are utilised, higher rates of tax minimised and tax liabilities reduced as a result.

“The proposed change will certainly keep the accountants on their toes as each potential claim for averaging will necessitate the re-calculation of five years income tax liabilities.

“The devil is however in the detail and we eagerly await the final legislation to be published following the consultation period.”

Click here for details on how to respond to the consultation.