This article first appeared in Farm North East.

As we look ahead to 2023, our sector continues to face a number of challenges - first and foremost the uncertainty of Scottish Government’s Future of Agricultural policy and the concern around food security; volatile market prices; rising input costs; soaring energy bills; labour challenges and the ongoing ripple effects of Brexit, which continue to impact many businesses. This reinforces the need to be forward-thinking, plan ahead and remain agile.

Throughout the coming months, three key areas that should be on your radar are:

Basis period reform

The tax rules determining when trading profits of unincorporated businesses are subject to income tax are changing. 

Currently, unincorporated businesses, such as sole traders and partnerships, including LLPs, are taxed on the profit or loss for the 12 months ending with the accounting date which falls in the tax year, which is known as the ‘current year basis’. For example a business with the accounting year end 30 April 2021, would be taxed on this income in the 2021/22 tax year.

Basis Period Reform will tax the profit or loss that arises in the tax year.

2023/24 is the transitional year for the reform, with full introduction in 2024/25.

The changes remove the basis period rules and the creation of overlap profits. Due to current basis period rules, the same profits can be taxed in more than one tax year. These duplicated profits can be deducted in a future year (overlap relief) when either the accounting year is moved closer to 31 March/5 April or on cessation. On transition to the tax year basis in 2023/24, businesses’ basis periods will be aligned to the tax year.

For businesses with an accounting year end between 31 March and 5 April, these rules will mean no change. For other businesses, it’s likely to bring forward the date on which taxable income will need to be calculated and tax on those profits will need to be paid. It’s therefore vital that you review the implications now if you haven’t already.

Affected farming businesses can prepare for this change by identifying any existing overlap profits (your accountant can assist) and reviewing the best timing for any capital expenditure, diversification projects, succession planning, business cessation, partner retirement, and saving for retirement via personal pension contributions. It may also be worth considering whether to permanently change the year end date of the business, and the pros and cons of incorporation and operating as a company. However, in this case the benefits of farmers’ averaging will be lost.

Tax planning

Regardless of whether basis period reform will impact you, as we approach the tax year end on 5 April, planning is absolutely key.

If your taxable income has fallen this year, a claim to reduce your upcoming payments on account could be made. It is also worth considering undertaking any significant capital expenditure before the year end to maximise any potential tax reliefs available – bearing in mind the potential impact of basis period reform too.

Farmers’ averaging claims could also be beneficial if your profits have fluctuated over the past few years. This could result in tax savings where a claim can be made to average your profits over two or five years.

Contributions to pension schemes can also provide additional tax relief to higher rate taxpayers. The contributions need to be made before 5 April each year, so you may wish to review your earnings for the year to ensure that you maximise the relief available and do not breach any limits.

Register of Controlled Interests

On 1 April 2022 the Register of Controlled Interests (RCI) came into effect. The RCI is a Scottish Register of Persons holding a Controlled Interest in Land, held by Registers of Scotland. The regulations require specified categories of owners of land and tenants of long leases (a lease of over 20 years), and their Associates, to register on the RCI. If you have not registered by the end of the transition period on 1 April 2023, penalties will apply, so it’s important to clarify whether you must do so. More information on the categories and the exceptions is available on the Registers of Scotland website. We suggest you speak to your legal advisers to ensure you are compliant in this regard.

The team at Johnston Carmichael is here to help. Making a head start with your planning now will help to ensure you’re in good shape and prepared for the changes coming in 2023. If you have any questions, don’t hesitate to get in touch with myself, or our experienced Rural team.