With the average farm gate pence per litre/kg increasing significantly over the last year, in some cases by more than 10p per litre/kg to a current average of around 27 to 28 p per litre, the effects on profitability and hence possible tax payable, be it personal tax or corporation tax, are significant. Optimising production to align as best as possible to your buyers profiles can further enhance the pence per litre achieved. On 1 million litres of production, a 1p per litre movement equates to £10,000 movement on annual milk income – if costs are kept constant, this goes straight to the “bottom line”.
Many dairy farmers had a poor 2016/17 trading year, when looking at either accounts or taxable profits compared to the previous years. Farmers averaging, be it either over 2 or 5 years has been used in many cases, and so a tax reclaim has resulted. As farmers, you will no doubt have appreciated a reasonable tax refund or less personal tax payable in July 2017 and January 2018. With costs being cut as much as possible in 2016/17, and continuing into 2017/18, profitability is likely to have improved significantly in 2017/18.
So, what of the July 2018 and January 2019 personal tax payable? Personal tax instalments are calculated as half the tax due from the previous accounts year, and in the case of the January payment, the balance of tax due for the accounts year that falls within the year to 5 April the previous year. As the personal tax for 2016/17 is likely to be significantly less than due for 2017/18, the January 2019 tax payable may be a shock to some, although further averaging could affect this too.
Many accountants suggest buying equipment before the end of the accounts year – why is this? The answer is because generally 100% of the cost of the equipment (subject to any trade in) can be offset against the accounts taxable profits up to a £200,000 annual net spend – if you spend more than this in a year, you get less allowances in the year on the portion over £200,000, however, there are allowances to carry forward to subsequent years whereby reducing tax in the future, albeit to a lesser extent.
If you did not purchase equipment before your accounts year end, all is not lost. There is the possibility to reduce the “payments on account” for personal tax if you feel that your taxable profits for 2018/19 will fall. Doing this should not be considered lightly. If the actual taxable profits are more than anticipated, there could be interest payable to HMRC on the tax “paid late”.
If you would like to discuss any of the above, or have concerns about a possibly large tax bill in January 2019 please contact your usual contact or any of our farming team throughout Cumbria & SW Scotland. For specific dairy related queries, or if you are looking at maximising the value of the milk you produce, contact Will Robinson in our Carlisle office on 01228 534371, 07475 470132 or email wr@saint.co.uk
