How Basic Payment Scheme payments can impact your tax bill

The recognition of BPS for tax purposes is more complicated than just recognising it when it is received into your bank account.

While BPS replaced the Single Farm Payment Scheme in 2015, guidance on this point issued by HMRC shortly after the introduction of the Single Farm Payment Scheme in 2005 remains unchanged. This guidance gave the choice of two accounting policies:

1. To recognise the income as soon as the claim is made in May each year.
2. To recognise the money on 31^st December each year, on the basis that until that date a farmer could fall foul of cross-compliance regulations and not receive the full amount.

A business is free to choose either policy as long as it applies it consistently. Therefore, if for example your business has not recognised BPS until December each year but you prepare your accounts to 30^th September each year, you can defer recognition of the interim 2022 receipt in the September 2022 accounts, even though the money was in your bank.

In previous years, when BPS payments were regularly received late, this meant including BPS in accounts before the money was received. The benefit of either of the above accounting policies is that there will always be one BPS claim in each accounting period. This should prevent the fluctuations of profit that would occur if BPS was recognised in accounts when received.

There is uncertainty over whether HMRC will change its approach in 2024 when BPS receipts are delinked, and it is no longer necessary to occupy land or meet cross-compliance conditions. It is hoped that HMRC will allow receipts to be recognised for tax purposes using the same basis as was agreed in 2005 until BPS ceases to exist in 2027.

Equally, we do not know when income from the replacement schemes, such as ELMS or SFI, will be recognised for tax purposes. The general accountancy rule is that government grants should be recognised as soon as all the conditions of the scheme have been met. Again it is to be hoped that HMRC accepts sensible policy of when to include them in accounts.