LANDSCAPE Information and advice to help you grow your business | jcca.co.uk
TAX CREDITS | CONTRACT FARMING | ESTATE MANAGEMENT | RETIREMENT
2 2014 Budget impact on the farming community BUSINESS
3 Advice on structuring your business ON THE FARM
4 The joy of farming RETIREMENT
5 Planning for your future after the 2014 Budget CONTRACT FARMING
6 Farming partnerships ‘under attack’ by HM Revenue & Customs
8 Tax considerations when selling farmland
10 Recovering VAT on a farm worker’s house ACCOMMODATION
11 Living accommodation: the tax exemptions ADVICE
12 On the farm – tax planning tips TAX CREDITS
13 Claim Tax Credits before it’s too late
ON THE ROAD Our farming team will be represented at the following shows this year: Angus Show 14 June Royal Highland Show 19-22 June Perth Show 1-2 August Turriff Show 3-4 August Black Isle Show 6-7 August Please get in touch with Robin Dandie on 01307 465565 if you are visiting and would like to catch up.
Welcome Welcome to our new 2014 edition of Agricultural Landscape
At Johnston Carmichael we are growing all the time with 11 offices throughout Scotland looking after over 1,700 farmers and their business in the agriculture and rural industries sector. We are delighted to announce the recent appointment of Douglas Baxter as Director based in our Perth office. From a farm himself, Douglas brings a wealth of experience of dealing with farming, estate and rural business. We continue to work closely with NFU Scotland and are delighted to provide tax and business advice through a dedicated helpline, exclusive to NFUS members. We know that some of the current key issues for our clients include the uncertainty over the detail of CAP reform and what it will mean for their businesses. For many, there may be a substantial reduction in support payments over the next few years and, of course, no guarantee that market prices will rise to cover the shortfall in income. Once the rules for the new regime are in place, businesses will have to plan for how to deal with the changed financial situation. On the subject of change, the articles we have prepared for this newsletter highlight the ever changing rules and regulations that affect tax and finance, particularly for rural business. We have an update on Tax Credits, which are still relevant due to delays in the implementation of Universal Credits and we highlight changes to rules for partnerships, which will affect some businesses. We also have comments on what sort of business structures might be most suitable for farmers. Recent amendments in the Budget for both tax and investments are highlighted, along with PAYE and VAT issues and a review of the points to be considered when selling land. Finally, see On the Road for the list of shows where we will be this year. Come and see us â€“ weâ€™ll be delighted to talk about any of the changes afoot. See you there.
Robin Dandie Head of Agriculture
Johnston Carmichael / jcca.co.uk
2014 Budget impact on the farming community The 2014 Budget was put forward as a Budget for building a resilient economy, by helping businesses that invest and export, backing manufacturers and supporting savers. There were a number of announcements that will be of particular interest to farmers. Capital allowances Perhaps of greatest interest will be the changes to the capital allowances legislation. The Annual Investment Allowance (AIA) provides 100% tax relief on capital expenditure. In January 2012, the AIA for certain classes of expenditure was increased to £250,000, but this relief was due to come to an end on 1 January 2015. The Government has now announced that the AIA is to increase to £500,000 for all qualifying investments from April 2014 until 31 December 2015. This is a generous increase that will be of significant benefit to many farmers and other firms, in the form of 100% tax relief on their qualifying investment. The AIA can cover a wide range of capital expenditure but, as an example, the cost of putting up a new cattle shed will qualify in part but not in total. It had been hoped that Agricultural Buildings Allowance would be re-introduced to allow the whole cost of, for example, a cattle shed to qualify for tax relief, and the Government was lobbied on this basis in advance of the Budget. Unfortunately, however, no changes were made.
JOHN TODD is a tax partner in our Inverness office
The changes to the rules will impact partnerships where profits are allocated to partners who pay the lowest rate of tax
Partnerships involving limited companies We were hoping there would be changes to the ‘mixed partnership’ rules announced in the 2013 Autumn Statement, but nothing was altered and the planned changes will go
Johnston Carmichael / Where sharp minds meet
ahead. Mixed member partnerships include individual and corporate partners and, while there may be good commercial reasons for farms to operate as a mixed partnership, there had been concerns that they were being widely used to avoid tax and national insurance in other sectors of the economy. The changes to the rules will affect partnerships where profits are allocated to partners who pay the lowest rate of tax (possibly the corporate partner) and losses are allocated to partners who are the higher rate taxpayers (possibly the individual). For further detail, see page 6.
National Insurance Contributions No major changes to National Insurance Contributions (NICs) were announced. From April 2014, however, all employers were given a discount of up to £2,000 on their Class 1 employer’s NICs. This means that small employers who do not have a £2,000 liability in the year will simply have no Class 1 employer’s NICs to pay. Also, from April 2015, employers who have employees under 21 years of age will no longer have to pay Class 1 employer’s NICs on earnings up to the upper earnings limit.
Advice on structuring your business The farming businesses that Johnston Carmichael acts for typically fall into three common structures: sole trader, partnership or Limited Company. In a sole trader business, the individual is the proprietor of the business and is legally and financially responsible for its operations. Any profits generated by the sole trader are the individual’s. Partnerships involve two or more people, with any profits generated belonging to the partners. They are jointly and severally liable for the firm’s debts. A partnership agreement is typically drafted whenever there is a new partnership, or an amended partnership agreement would be drafted where there is a material change to the partnership, for example a change in partners. Both sole traders and partners in partnership are regarded as self-employed for taxation purposes. Individuals in businesses and partners will be subject to income tax and national insurance on any profits allocated to them. Depending on the profits
allocated, income tax of 45% could be payable and up to 9% of profits could be assessable to national insurance. A Limited Company is regarded as a separate legal entity in the eyes of the law. Any profits generated by the company belong to the company. A Limited Company allows you to raise capital, issue shares and limit your risks through limited liability. Limited Companies pay corporation tax and up to 21% may be payable, depending on the profit level of the business. Any funds extracted by the owner of the company (the farmer shareholder), through salary and dividend for example, will be subject to normal income tax and national insurance rates. We all hope that our farming clients make good returns; however, when they do, higher rates of tax could apply. So why don’t all of our farming clients operate through Limited Companies to guarantee a maximum 21% tax rate on profits? Every farming business is unique, so at different stages in the life cycle of a business it may be appropriate to consider whether the business structure is still appropriate.
PETER INNES is one of our directors in Stirling
A Limited Company is regarded as a separate legal entity in the eyes of the law
In addition to tax reasons for changing business structure, there could be other reasons such as: Reducing personal risk exposure. For example, a Limited Company will limit liability. However, creditors such as the bank may still look for personal guarantees from the shareholders. Planning for retirement or selling the business. For example, sole proprietorship or partnerships may dissolve on death. Ownership of a Limited Company may be more readily distributed to family members. It is important to advise authorities such as HMRC if you are making any changes. This may sound onerous, but it can be an opportunity. A change in business structure – moving from a sole trader business to a partnership, say – can be an opportunity to establish a herd basis election over a breeding group of animals on a holding, where there was no election in place previously. We would recommend taking professional advice before changing your business structure.
Johnston Carmichael / jcca.co.uk
ON THE FARM
The joy of farming Jennifer Cormack gives us an insight into her hectic double life during breeding season While many of my friends jet off to sunnier climes on their holidays, living on a farm my ‘free’ time is inevitably devoted to my flock. With 30 breeding cows and 80 breeding ewes, we have a pretty busy calving and lambing season. Each year, I aim for this to coincide with two weeks off work. This year, though, our inconsiderate cattle mostly waited until my return to get things going. Working all day and calving all night is far from an ideal situation! Rise and shine A typical day usually starts with checking the cows and ewes for any new arrivals, ensuring they are all healthy and have had a drink and penning them individually. Any lamb or calf that hasn’t had a drink is either fed by bottle or tube. The rest of the cows and ewes are fed, bedded and watered. I am sure my cows drink far more when they know I have to carry pails of water to them! Time to go It’s then, just as I’m heading back to get cleaned up and ready for a busy day of accounting, that a cow who has been restless through the night decides that it’s
time to calve. With a sigh and a quick check of my watch, I deal with the impending birth. Once calved, she is penned up with her new arrival to make sure the calf gets colostrum. After a few choice words with the cow, who is rather less friendly now that she has a calf to protect, I finally manage to persuade her to let her offspring suckle. I iodine the calf’s naval, ending up with more iodine on me than the calf, before a dash to get ready for work. En route, I check on the wind turbine controls to ensure everything is running smoothly and no switches have tripped as sometimes we need to reset the turbines and trip switches. Change of role Arriving at the office with my accountant’s hat on, I discover the iodine on my hands has not washed off as well as I had thought, but by luck my appointments for today are mainly with farming clients who understand my predicament. Dealing with anything from stock valuations to cashflow plans, I have a busy schedule of meetings with clients all day. We discuss many a problem I can relate to, and share stories of lambing and calving dilemmas we have
Johnston Carmichael / Where sharp minds meet
had. I hope everything is OK back on the farm!
JENNIFER CORMACK is a general practice director in our Huntly office and a farmer
Back to business I enjoy a rare bit of peace and quiet on the drive home, before a quick change of clothes and back to feeding, bedding and watering livestock. Then it’s time to tag some calves and register them with BCMS online, ensuring they are done within the 27-day limit, so that we can claim the Beef Calf Scheme payment. With the recent uncertainty surrounding the CAP reform, some farmers may have been considering some form of diversification. This makes me wonder if Johnston Carmichael would consider diversification in relation to its service lines. Could it include a service line for calving and lambing assistance? Counting sheep I check on the cows, calves, ewes and lambs again before bed, and pray for a quiet night. It’s not to be, though, as another cow looks like she’s ready to calve. Ah, the joy of farming.
Planning for your future after the 2014 Budget George Osborne’s 2014 Budget produced some interesting changes, particularly in terms of retirement planning. So what are the options now, what is changing and what are the opportunities? Where were we before the Budget? At retirement, there are two options. You can buy an annuity which is designed to provide you with a guaranteed fixed income for your life. Annuity rates, however, are currently low. Alternatively, you can withdraw a portion of the pot, otherwise known as tax-free cash, and leave the rest invested. The remaining sum can provide you with a regular income stream thereafter, which is taxed at the marginal rate. This is known as drawdown, which comes in two forms – capped and flexible. Capped has a ceiling on how much income you can take, set at 120% of the rate of a single-life annuity policy. The maximum income is determined by the Government Actuary’s Department, known as GAD. Flexible drawdown has no cap on the level of income, but you must be able to prove that you have other pension income of at least £20,000 a year. However, from 27 March 2014, the GAD rate for capped drawdown increases to 150%, offering the ability to take more income from your pension on an annual basis. For those preferring flexible drawdown, the minimum annual pension income needed will reduce to £12,000. What’s new? Provided the Budget changes are ratified later in the year, from April 2015, the significant
changes start. Capped and flexible drawdown will disappear to make room for a more general drawdown option and everyone will be able to access all of the money held from the age of 55. The tax for the withdrawal of the entire pension pot will be your prevailing rate of tax. If retiring between now and April 2015, it is imperative that you seek independent advice and, where possible, consider deferring your pension until April 2015. Anyone who wants tax-free cash before April 2015 can do so under existing rules and still benefit from next year’s reforms. If you are planning to retire after April 2015, there will be three options: Buying an annuity; Taking money as and when needed; or Taking the whole pension.
If retiring between now and April 2015, it is imperative that you seek independent advice
CRAIG HENDRY is Managing Director of JC Wealth in Inverness
Naturally, each of the three options requires careful consideration. ISA reform A major reform of ISAs was also announced in the Budget. From 1 July 2014, a simpler product, the ‘New ISA’ (NISA), will be available with an overall annual subscription limit of £15,000 and greater investment flexibility. The £15,000 limit can be invested wholly in cash or stocks and shares, or any combination between the two. Existing ISAs held at 1 July 2014 will automatically convert to NISAs. From 6 April 2014 to 1 July 2014, the ISA subscription limit is £11,880 and savers will have the ability to make additional contributions up to the £15,000 limit in tax year 2014/2015. Johnston Carmichael / jcca.co.uk
Farming partnerships ‘under attack’ by HM Revenue & Customs Businesses in the agricultural sector (and other sectors) which carry on their business activities as a ‘mixed partnership’ need to review their affairs and take action. A mixed partnership is a partnership made up of individuals and ‘nonindividuals’. Typically, this involves a family company, although the meaning can extend to any partnership which is made up of more than just individual partners. In December 2013, HMRC released proposed changes to partnership taxation. These changes came into effect on 6 April 2014 and will have an impact on mixed partnerships and their allocation of profits. Whilst it is understood that the farming community was
not HMRC’s target, the legislation introduced in the Finance Bill will have a direct impact on this sector. Up until now, businesses using a mixed partnership arrangement could take advantage of the flexibility of the structure when it came to the allocation of profits and losses within the business. Whilst individuals’ top rate of income tax is 45% (plus National Insurance Contributions if applicable), a company has a maximum corporation tax rate of 21% (which is due to decrease to
ALEXANDRA DOCHERTY is a tax director in Edinburgh
20% next year). Additional tax charges can arise when it comes to extracting profits from the company. For farming businesses where reinvestment is key to the future of the business, the lower tax rate incurred on profits arising to the corporate partner allowed for greater profits (after tax) to be reinvested in the business.
The Finance Bill changes came into effect on 6 April 2014 and will have an impact on mixed partnerships and their allocation of profits
Johnston Carmichael / Where sharp minds meet
What do these changes mean for your business? As of 6 April 2014, it will no longer be possible for a mixed partnership to allocate ‘excess’ profits to the corporate partner, where that company is connected with the individual partners in the business. From now on, the allocation of ‘excess’ profits or losses to the
company will be ignored by HMRC when it assesses each partner, and the ‘excess’ profits or losses will be reallocated to the individual partners as appropriate. The majority of mixed partnerships are made up of family members, with the shares in the company usually being owned by some of the individual partners. The changes to the rules are going to result in the reallocation of profits to the individual partners (in a lot of cases), who may end up paying a 45% income tax rate (plus NICs) on the profits, versus a 21% corporation tax rate previously. In future, excess profits allocated to the corporate partner will be reallocated on a just and reasonable basis.
What action should you and your business take? Johnston Carmichael has been reviewing clients who are impacted by the changes and it’s clear one solution does not fit all. For some businesses, this will mean maintaining the company structure within the partnership if, for example, the company carries out other services for the farming partnership for which it receives payment. Alternatively, farmers will look to incorporate their partnership to enjoy the more attractive corporation tax rates. On the other hand, some businesses may have no further requirement for the corporate partner and seek
Changes to the Finance Bill will result in the reallocation of profits to the individual partners
to wind up the company, extracting any funds within the business at as low as a 10% Capital Gains Tax rate with the right planning. It’s not all bad news, however. Going forward, for mixed partnerships which fully incorporate, or for businesses which wind up their corporate structures, an Annual Investment Allowance should be available for qualifying expenditure on plant and machinery. With the threshold for qualifying expenditure having recently been increased to £500,000, on which 100% tax relief is available (incurred between now and 31 December 2015), this is an ever more valuable relief. Johnston Carmichael / jcca.co.uk
Tax considerations when selling farmland Capital Gains Tax (CGT) needs to be at the forefront of any landowner’s mind when considering the sale of farmland. The difference between paying 28% and nil could be a substantial number, given the significant upturn in land values from 1982 to the present day. Initially, some questions should be considered: Who is the landowner? Who occupies the land? Is the land agricultural property? Is the land used for agricultural purposes? What was the historical use of the land during ownership? Is the land a partdisposal? Why is the land being sold?
Will the disposal proceeds be retained or reinvested? If reinvested, what type of assets are the proceeds being reinvested in? What is the base cost of the land? Are any historic capital losses available? Having a full picture will assist in calculating the likely chargeable gain and resulting liability on disposal. Capital Gains Tax reliefs There are specific reliefs available that must be considered which either reduce or defer CGT liability. The availability depends on the context of the disposal and whether the qualifying conditions have been or can be satisfied prior to the disposal date.
Johnston Carmichael / Where sharp minds meet
The sale of farmland typically involves large values
Holdover/Gift relief This relief permits the gain to be deferred by rolling over the gain on the asset gifted against the cost of the asset in the hands of the donee. It can be claimed in circumstances when the asset being gifted is a business asset, which includes agricultural land and buildings used for the purposes of farming, or the gift is immediately chargeable to inheritance tax. This relief can be useful where the intended farmland to be sold has previously been rented or has private usage. Gifting the land to the next generation and then farming such land ‘in hand’ prior to a final sale can allow the land to be ‘cleansed’, making it qualify for alternative reliefs.
Rollover relief This enables the gain to be deferred by rolling over the gain on the asset disposed against the cost of the new asset purchased. It can only be claimed in circumstances where the individual is carrying on a trade and the assets, both old and new, are used for the purposes of a business. The relief can be restricted in circumstances where the proceeds are not fully reinvested, as the amount retained is immediately chargeable to CGT. It can be useful where a part disposal of land is intended and the proceeds are going to be reinvested within the business as part of upgrading farm buildings through permanent improvements. Entrepreneurs’ relief This relief is available to reduce that rate of CGT payable to 10% on qualifying disposals, up to a maximum lifetime limit which is currently £10 million. It is essentially available where there is either a ‘material disposal’ of ‘business assets’; or a disposal which is ‘associated’
be made to have the sale not treated as a disposal. Instead it will reduce the allowable cost of the remaining land for a future disposal. This claim may not be made if other disposals of land are made in the same year and the total proceeds for all disposals of land exceed £20,000. An immediate benefit of this claim is the provision of funds without any tax charge under CGT. Furthermore, for partnerships this claim is available to each partner, so for partnerships with a number of partners this can prove very beneficial.
with a material disposal; or a disposal of trust business assets. A business asset means the whole or part of a sole trade or partnership business; or a disposal of an asset used in a business at the time the business ceases to be carried on; or disposal of shares in a company. The relief can be restricted for associated disposals where the asset has partial business use, or where a rent has been paid by the business for use of such assets. The restriction will be on a just and reasonable basis. Early planning is vital to secure this very valuable relief, where the intention is to retain the disposal proceeds due to the disparity between 28% and 10%. Part-disposals This is not a relief, but the rules regarding such disposals should not be ignored, especially for small suitable land plots and in a partnership context. Where such land is sold for £20,000 or less and the proceeds represent not more than 20% of the value of the whole holding, a claim can
NEIL STEVEN is Director of General Practice in Edinburgh
Summary Investing time upfront to minimise the impact of CGT through utilising the various reliefs can provide major cash savings. Every sale will be unique, so leaving any planning to the last minute will result in unnecessary CGT being paid. Nobody enjoys paying tax, let alone overpaying tax through poor planning.
Johnston Carmichael / jcca.co.uk
Recovering VAT on a farm worker’s house During the early days of VAT completing a VAT return was a relatively straightforward matter – but how times have changed. Now the completion of a VAT return requires careful attention, making sure VAT is only reclaimed where there is a business entitlement to do so. Farmers can often find themselves acting as landlords, incurring expenditure on repairs and maintenance of properties. Depending upon the nature of the rental income, VAT incurred on property repairs may or may not be recoverable. Take, for example, a farmer who has agreed with a farm worker that he/she will be provided with a cottage as part of their contract of employment, and no rent is to be paid by the worker. For VAT purposes, this means that providing that the farm worker only works on the taxable activities of the farm, then VAT incurred on repairs and maintenance will be recoverable in the normal way.
GRAHAM SEAGER is a VAT and employment tax partner in Edinburgh
Farmers can recover VAT on property repairs carried out for tenant workers engaged in such taxable activities as food production
Johnston Carmichael / Where sharp minds meet
At the same time, many larger farming businesses continue to provide their former workers with accommodation after retirement. These properties remain business assets which will again, in due course, be occupied by farm workers. In such circumstances, HMRC accepts that VAT incurred on the repair and maintenance of these properties occupied by former workers and their families can be recovered in the normal way. However, take, for example, those properties that are let to a farm worker who pays rent, or let to third parties who are not employed. Here, the VAT incurred on repairs and maintenance cannot be automatically recovered as the property is now being used in making VAT exempt supplies – i.e. VAT is not charged on the renting of residential property. As a result, HMRC’s partial exemption rules come into play and only if the VAT incurred falls below the de minimis limit is VAT recovery allowed.
The de minimis limit applies in any VAT month, quarter or year, where VAT incurred in relation to exempt supplies: does not amount to more than £625 per month on average, and does not exceed more than 50% of all VAT incurred on expenditure. If this is fulfilled, VAT in that period is recoverable in full, subject to the normal rules – for example, obtaining a proper tax invoice. Given HMRC’s penalty regime, mistakes can be costly. Any inaccuracy picked up by HMRC during a VAT inspection can be subject to a penalty if HMRC takes the view that the inaccuracy is ‘careless’, ‘deliberate’ or even worse, ‘deliberate and concealed’. The penalty percentage can be as high as 100%. Therefore, the key here is to be careful and analyse the nature of the expenditure. If you are in doubt, speak to a member of the Johnston Carmichael VAT team.
Living accommodation: the tax exemptions As a starting point, all living accommodation provided by an employer is taxable. However, exemptions may apply in circumstances that mean it is ‘job-related accommodation’. Exemptions from charge There are three possible categories that give exemption from any tax charge. HMRC acknowledges that agricultural workers who live on farms/ estates may be accepted as being within the first of these exemptions and this is where residence in the accommodation must be necessary for the proper performance of the duties of the employment. Broadly speaking, the ‘necessity’ to reside in the accommodation must arise from the relationship between the proper performance of the duties and the dwelling house, and not from the personal exigencies of the employee. It is not sufficient that the employer insists the employee resides there. It has recently been noted by the Office of Tax Simplification that such an exemption, owing to individuals having greater mobility than when the provisions were initially enacted, may be outdated. This means that the exemption could potentially be subject to revision in the future. For directors, it may not be possible to be in job-related accommodation and thus exempt from a tax charge. The exception to this rule is where the director has no material interest in the company (i.e. having less than 5% of the ordinary share capital) and is either a full-time working director, or the company is non-profit making, or was established for charitable purposes only.
The exemption could potentially be subject to revision in the future
DOUGLAS BAXTER is Director of General Practice in Perth
Valuing the benefit The calculation of the taxable value of the benefit depends on whether the accommodation cost more or less than £75,000, and whether the employer owns or rents the property in question. For properties that cost less than £75,000, the value of the benefit is the greater of: the rent paid by the employer; or the annual value of the premises, less any contribution made by the employee to offset the cost of providing the benefit. A proportionate reduction is available where part of the premises is occupied for business purposes. Annual value is normally taken to be the gross rateable value or, if greater, the rent paid by the employer. In practice, the old rateable value has been used even though this was replaced by Council Tax some years ago for UK-based property. However, if the employer rents the house from a third party, the rateable value cannot be used if the rent payable is more than the gross rateable value — which is likely to be the case. Where the cost of the property concerned exceeds £75,000, the above charge is levied together with an additional charge.
The additional charge is calculated in respect of the excess of the cost over £75,000 (less any contribution made by the employee) at the official rate of interest (3.25% for 2014/15). Where a property is occupied for only part of a year, the chargeable amount is proportionately reduced. Similarly, if the property is occupied by more than one employee, the charge will be apportioned and cannot exceed the maximum amount that would have been chargeable if the property had only been occupied by one person. Expenses and other assets It is sometimes the case that expenditure for running costs (e.g. heating, lighting, cleaning) is either paid for by the employer or reimbursed to the employee occupying the company’s property. The tax benefit of such items falls within the normal P11D reporting system and the usual benefits rules must therefore be followed. If assets are placed at the employee’s disposal in the accommodation, they are subject to a special annual value tax charge, computed at 20% of the market value of the asset when it was first provided. This could apply to something like a television or indeed a whole house of furniture provided by the employer. It is important to note that if the living accommodation is not taxable, there is a restriction to the other taxable benefits. Broadly speaking, the benefit arising on additional costs met by the employer may be restricted to 10% of the employee’s earnings. Johnston Carmichael / jcca.co.uk
On the farm – tax planning tips When considering income tax planning, it is important prior to each business year end to have a feel for how the year has gone and to have an idea of the profitability of your business, bearing in mind the capital allowances available from capital expenditure. If it has been a good year, consideration can then be given as to whether additional capital expenditure should be made or whether farm repairs should be carried out prior to the year end, to reduce taxable profits and obtain tax relief. However, capital expenditure should not be incurred purely to save tax. The preparation of an annual budget, and monitoring it against actual costs and revenues, is an excellent management tool. It can also provide an early indication of the most tax-efficient time to invest in qualifying capital assets. After the year end and once taxable farm profits are
known, together with an estimate of other income for the tax year, consideration could be given to making a pension contribution which can reduce exposure to higher rate tax and reduce tax liability. Tax relief on pension contributions is obtained in the year that the pension contribution is paid. Therefore, a business with a year end early in the tax year has the benefit of knowing actual taxable profits. However, if the year end is late in the tax year, for example 31 March, then pension contributions will be based on estimated profitability. For farmers, farm averaging can be beneficial when a successful year is preceded
Johnston Carmichael / Where sharp minds meet
GRAHAM LEITH is Director of General Practice in Inverurie
or followed by a bad year. The taxable profits may be averaged over two years if the profit of one year is less than 70% of the profit of the other year, with marginal relief available if it is more than 70% but less than 75%. The use of a spouse’s or children’s personal allowances can also be considered to avoid higher rate tax and thus increase the family’s overall wealth. For this to work, the spouse or children would need to be partners or employees of the business. The above tax planning points should be carefully considered with your usual Johnston Carmichael advisor where appropriate.
Claim Tax Credits before it’s too late Tax Credits remain a valuable income stream for many of our farming clients. The examples detailed below, based on 2014/15 rates, illustrate the level of awards that can be achieved. The calculation of ‘income’ for Tax Credit purposes is complex and not just a matter of taking income figures from the annual accounts, nor income figures from the Scenario
Tax Credits claimed
Sole claimant Couple
NEIL SMITH is a tax manager in our Huntly office
annual tax return. The main factors affecting ‘income’ for Tax Credit purposes are: Capital allowances claimed in any one year reduce the taxable profits and reduce ‘income’ for Tax Credit purposes too. If a loss from selfemployment is computed, after claiming capital allowances the loss can be relieved against other
Amount awarded for income under £6,420
Income level at which award reduces to zero
… with one qualifying WTC, CTC child
… with two qualifying WTC, CTC children
… with three qualifying children
WTC: Working Tax Credit, CTC: Child Tax Credit
income arising in that year for that individual, as well as his or her spouse’s income. Pension contributions and Gift Aid donations made in any one year can also be deducted in arriving at ‘income’ for Tax Credit purposes. If a claim for farmers averaging has been made on your tax return, this is ignored for Tax Credit purposes, as it is the profit before averaging that is used to compute the ‘income’ figure. Farming profits invariably fluctuate from year to year and capital allowances can have a significant bearing on this. Therefore, Tax Credit awards can vary significantly too, and it is vital that any claim is managed well to ensure that overpayments are avoided where possible. Income disregards remain in place which impact upon the Tax Credit award from one year to another, as illustrated by the examples below: Income rise disregard of £5,000 Let us assume ‘income’ in 2013/14 and 2014/15 was £20,000 and £24,000 respectively. As the rise in ‘income’ is less than £5,000, the final award for 2014/15 would be based on the income figure of £20,000. Had the ‘income’ in 2014/15 been £28,000, the final award for 2014/15 would be based on an ‘income’ figure of £23,000 (£28,000 less £5,000). Income fall disregard of £2,500 Let us assume ‘income’ in 2013/14 and 2014/15 was £20,000 and £14,000 respectively. The first £2,500 of any drop in ‘income’ is disregarded so the final award for 2014/15 would be based on an ‘income’ figure of £16,500. The valuable income stream that Tax Credits have provided to farming clients is to come to an end within the next couple of years, so it may well be worth discussing with our team. Johnston Carmichael / jcca.co.uk
For further information and advice please contact your nearest Johnston Carmichael office: Aberdeen Edinburgh Elgin Ellon Forfar Fraserburgh Glasgow Huntly Inverness Inverurie Perth Stirling www.jcca.co.uk
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