Dairy profits are likely to weaken during 2009/10, but there are plenty of tax savings up for grabs
Dairy profits are likely to weaken during 2009/10, but there are plenty of tax savings up for grabs, writes Andrew Vickery from Old Mill Rural Services.
Lower milk prices during 2009 have eroded dairy farmers’ profits, but cheaper inputs mean many producers will be able to continue rebuilding their balance sheets. And with a number of tax incentives to take advantage of, now could be the perfect time to invest in the business.
Although last year was a turbulent one for the wider economy, it was very much business as usual for many milk producers. A 10% slide in milk prices proved disappointing, and Old Mill expects dairy farm profits to be slightly lower than in 2008/09. Fortunately, some input prices have also eased, offering producers some further recovery after many difficult years.
Fertiliser prices fell significantly, as did domestic feed costs. However, overall feed prices remained stubbornly high due to imported commodities like rapeseed and soya, which proved expensive, partly due to the weaker pound. However, one benefit of the weak pound was its positive effect on the Single Farm Payment, which increased by 15% between 2008 and 2009.
The cost of borrowing also remained low, as a result of the cheap Bank of England base rate. Although some banks took the opportunity to increase their lending margins, many dairies have taken advantage of the cheaper finance to invest further in their units.
Clearly, it is vital to consider how to make such investments in the most tax efficient manner. The Annual Investment Allowance allows businesses to write off the full cost of qualifying plant and machinery expenditure in the year of purchase, up to a limit of £50,000. This can obviously provide valuable tax savings.
However, many dairy farmers are unaware of the additional one-off tax savings available in the current fiscal year. This means that any expenditure above the £50,000 allowance qualifies for 40% relief in the first year, rather than the usual 20%. This is one-year concession runs until 5 April 2010 for sole traders and partnerships, or 1 April 2010 for limited companies, so farmers need to act now to make the most of it.
Those considering investing in agricultural land or buildings have often done so using a pension fund – a particularly popular option for higher rate taxpayers. Even though the cost of borrowing is at a record low, many farmers resent having to repay the cost of their investment out of profits, which have been taxed at up to 40%. By using a self invested pension, the business pays for the project tax-free, saving up to 40% on up-front costs. So a building which would normally cost £100,000 to construct would effectively cost the farmer £60,000 – a healthy saving.
The 2009 Budget dealt a harsh blow to those earning more than £150,000 a year – who will soon be subject to a new 50% to rate of income tax. National Insurance contributions for individuals are also set to rise. However, in stark contrast the Government kept the small companies’ Corporation Tax rate at 21%, leading many of our clients to consider incorporating their businesses.
The potential savings from using a limited company can be dramatic. A husband and wife partnership making profits of £100,000 could save around £7,800 – a 30% reduction in their tax bill. Even with lower profits of £60,000 the saving could be as much as £2,700 – a 22% decrease in tax liability.
Limited companies can also be more efficient structures within which to repay debt. A limited company could be left with 79p in the pound for debt repayment, rather than 59p for a higher rate taxpayer trading as a sole trader or partnership, who would suffer income tax and National Insurance at a combined rate of 41%. Unlike pension contributions and plant and machinery purchases, a limited company structure has the added benefit of reducing income tax liabilities without tying up excess cash.
Preserving cash flow has been critical for all businesses during the economic crisis, and dairy farms are no exception. Many farms will have paid tax at the end of January, based on higher profits shown in their 2008/09 accounts. Sole Traders and Partnerships may have also included a payment on account towards their current tax year. With profits likely to slip during 2009/10, farmers should consider reclaiming some of this payment on account tax from HM Revenue & Customs, particularly where they have reduced profits through hefty plant and machinery expenditure in the current year.
With a general election looming, this year is likely to hold a few surprises in terms of tax changes, but there is much that farmers can do to structure their tax affairs as efficiently as possible. Planning ahead and taking the right advice is key to this, and Old Mill is always pleased to help. For more information contact Andrew Vickery on
01392 214834.