Cows & Money: Budget Update

Dodd & Co Dairy Bulletin: Summer Budget 2015

Yesterday’s budget pulled a few rabbits from hats. I must admit I had to follow it on twitter at the Livestock Event, but fortunately the home team pulled together to pick out the key points.

Dairy Bulletin HeaderWhilst the budget majored on making work pay, with higher minimum wages to come, at a level in excess of the old Agricultural Wages Board Rates, this will also see a reduction in tax credits. Most of the giveaways were to companies, although a ceasing of the relief for amortising goodwill was a major downside for many small businesses looking to incorporate, fortunately this won’t affect many farming businesses where goodwill is pretty much non-existent.

The key points that will be of benefit to farmers are as follows;

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Five Year Averaging

We now have a consultation document for 5 year averaging, if you fancy making any comment you have until 7th September. The document can be found here.

There are two proposals for averaging; an annual claim or an irrevocable election to average for five years. The latter might prevent other planning that you may wish to take advantage of such as creating losses, using AIA, or making pension payments.

5 year avg

There are also two options for the averaging calculation, a straightforward averaging of profits where all are averaged, or keeping a volatility condition. Currently profits for one year need to be less than 70% of the other year. Simplicity would suggest the former will be the favoured option.

It suggests all other existing rules will continue to apply, so profits will be calculated in the same way.

The new averaging system will be brought in from the 2016/17 tax year meaning farmers will be able to average from 2012/13 onwards.

For many dairy farms who had poor profits in 2012/13 but high profits in 2013/14 and 2014/15 the possibility of averaging those last two years with 2015/16 and probably 2016/17 looks very attractive. Unfortunately any tax rebate due as a result won’t be here until your 2016/17 tax return has been submitted.

As the consultation closes in September we will expect full details of the new scheme in the Autumn Statement.

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Capital Allowances

The announcement that Annual Investment Allowances (AIA) will be set at £200,000 for 5 years brings some certainty to businesses. This should stop the knee jerk investment created by changes to the allowances, and allow much more sensible investment decisions to be made by businesses.

CA

It should be noted that the change from £500,000 to £200,000 on 1 of January 2016 will for farmers with 31 March year ends mean that purchases made before 31 December will be covered by £375,000 of allowances (500 x 9/12), purchases made in the final three months of the year will only be entitled to £50,000 of allowances (200*3/12).

Anyone considering large capital purchases, and we know many aren’t in the current economic climate, should ensure they either fall before 31 December, or look at changing year ends to maximise any AIA claim.

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Inheritance Tax

There was much anticipation of an increase in IHT allowances yesterday and the Chancellor didn’t disappoint. If you read the technical note that was released on the point however you might think the proposals are a bit of a dog’s dinner!

Whilst individuals will benefit from a £175,000 personal residence relief, effectively taking the IHT band to £1 million per couple, it won’t be available to everyone.

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In order to qualify for the full relief the couple must own a house worth at least £350,000. So anyone with a house worth less than this won’t benefit fully, those downsizing will be able to lock into protection.

For most farmers however who own their own farms the scaling back of the relief so that if the net estate, i.e. total assets less liabilities, exceeds £1 million means that the relief will be lost if the net value of the estate exceeds £2 million. As the net estate is before reliefs such as Agricultural and Business Property Relief many farms won’t be able to benefit from this additional inheritance tax allowance.

There may be opportunities to plan to use this relief, but we are not going to get full details until September so any planning needs to be put to one side for now.

What is also clear is it is going to be complicated, and you wonder why they didn’t just increase the Nil Rate Band a bit!

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Wages Inflation

The announcements that minimum wages will be raised to £9 hour by 2020 has been criticised by some. For many farmers this will be in line with the old craft grade (4) agricultural workers’ rate of £8.62 in 2012. Given that there is no requirement to pay higher overtime rates under the minimum wage legislation, the £9 rate probably isn’t too much of an issue for qualified staff.

At the bottom end however it will be a significant increase to new workers’ rates with the additional employers’ NI meaning that wage costs will increase by £2.85 an hour for those currently aged over 21 and on the minimum wage.

To offset this a further £1,000 of credit against employers’ NIC will be available and corporation tax rates are to be reduced, not much comfort to most farming family businesses trading through partnerships.

If you would like to speak to anyone about the changes and how they may affect you please contact Rob Hitch on 01228 530913 or email rob@doddaccountants.co.uk

Alternatively tweet him @Rob__Hitch

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