Greater profits meaning larger tax liabilities
Many farmers enjoyed a bumper year in 2011 and the financial results reported on their self-assessment tax returns for the year ended April 5, 2012, may reflect this with greater profits generating larger tax liabilities, writes Pip Elms.
The balance of income tax in respect of the 2011/12 tax year is due for payment by January 31, 2013, so now is the time to ensure that there will be sufficient cash to meet this liability as late payment can incur costly fines; Also due for payment by January 31 is the first payment on account of the 2012/13 tax liability.
The tax system requires those under self-assessment to pay half of their tax liability by January 31 in the year to which the tax relates and half by July 31 shortly after the end of the tax year. These payments are automatically estimated based on the prior year's tax liability. Success in 2011/12 will mean that greater payments are due to be made during 2013. This will put an increasing strain on cash flows that may already have been affected by late harvests, poor yields and increasing costs of production.
I would advise farmers to not pay excessive payments on account unnecessarily. Farmers should consider the financial performance of their business to think about how the results for 2012/13 may differ from those reported for 2011/12.
If taxable income for 2012/13 is likely to be less than for 2011/12 they should consider making a claim to reduce the payments on account. It is important to take professional advice as the change in tax rules such as the reduction in the Annual Investment Allowance and Capital Allowances may counteract any reduction in business profits. Applying Farmers Averaging may create an overall tax saving too.
If payments are reduced in error and the actual tax liability for 2012/13 is greater than predicted, interest will be charged by HM Revenue & Customs on the underpayment at three per cent per annum.
* Pip Elms is a member of Whittingham Riddell's Agricultural Team
