Farming businesses are being told to plan for the consequences of Brexit. This is extremely difficult when the date and details keep changing while you have day-to-day farming decisions to make.
There are some more mundane but equally important areas of planning you can focus on - that of understanding your cashflow and your tax bills.
It is easy to say that because commodity prices are volatile and both income and expenditure will change, that a budget or cashflow statement for the year ahead is of limited use. By having a prediction of when cashflow is at its worst during the coming months, you are at least aware of the potential problem. If prices then change you can quickly identify the consequence, and whether you need to talk to your bank manager. A bank manger would much rather discuss the need for increased facilities before the event, than wait for you to go over your overdraft limit.
One effect of the introduction of Making Tax Digital for VAT purposes is that far more businesses now have up-to-date digital information which can be used for this purpose.
Insolvency experts will tell you that businesses get into difficulties because of a lack of cash which is different to a lack of profit. This is known as “over trading” when a profitable business gets into difficulty through running out of cash. Causes of this can include:
If a business does not generate sufficient cash to cover loan repayments, drawings, and increased working capital, then inevitably there will be pressure on the bank balance.
The main difference here is the treatment of capital expenditure. As mentioned above, assets are depreciated over several years, but this cost is not an allowable expense for tax purposes. Instead there is a system of capital allowances, and in recent years 100% relief has been available in the year of purchase of most farm machinery and commercial vehicles.
This means that depending on the level of capital expenditure in an accounting period, the taxable profit can be totally different to accounting profit:
The issues discussed so far in this article are equally applicable to partnership and limited companies. The timing of tax payments does differ according to the legal entity through which you trade. A company’s tax bill is much easier to understand with a single payment nine months after the end of the accounting period. An individual’s tax bill by contrast consists of two payments on account followed by a balancing payment. The payments on account are initially based on the level of profit in the previous year.
This means that where taxable profits fluctuate, either because of the level of capital expenditure discussed above or dramatic changes in milk or livestock prices, that the payments on account will be either too high or too low:
For assistance with managing your cashflow or tax planning, get in touch by calling 01228 690200 or email firstname.lastname@example.org.Find out more about our services to our Farming clients
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