We are currently going through a period of unprecedented change brought on by such issues as the pandemic, conflict in Ukraine, rising inflation and the related rise in the cost of borrowing.

Understandably, we will focus on those increasing costs - fuel, fertiliser, feed and finance costs.

To highlight, a 2% interest rate increase, from 3% to 5%, on a variable rate loan of £1mn repayable monthly over 10 years, increases the interest over the life of the loan by £114,057. Monthly repayments increase from £9,656 per month to £10,606. It is critical to quantify the impact on both cashflow and profitability at an early stage. 

For some, these cost increases will be mirrored by marked upturns in the returns being seen for their produce. In some cases, these upturns in output will outstrip the related costs.

Forecasting where your profits may end up is key, together with understanding how your taxable business profits can differ from your accounting profits to avoid unexpected tax hits.

When considering the adjustments required to calculate a business’ taxable profits, you should be mindful of two key adjustments:

• Depreciation is an expense which is disallowable when calculating taxable business profits. 
• In lieu of the depreciation cost, capital allowances are available on certain qualifying spend by the business.

Attaching numbers to this in a basic example and ignoring any other tax adjustments which may be required in the computation of taxable profits, if a business had an accounting profit of £50,000, after depreciation of £200,000 and no spend qualifying for capital allowances in the period, taxable profits for the business could be £250,000, when the business owners may be anticipating tax being assessed on profits of £50,000.

The lead time on ordering new equipment, such as tractors, is taking longer, resulting in larger taxable profits and tax bills for some where this delays a claim for capital allowances.  Organising lump sum pension contributions takes time too and cannot be left to the last minute.

Farmers Averaging can help individuals but be forewarned, forward projecting is definitely forearmed in terms of avoiding tax hits.

Get in touch

For more information or for help understanding your own specific circumstances, don’t hesitate to get in touch with me at Peter.Innes@jcca.co.uk, our expert Rural team, or your usual JC contact.