Cows & Money – June 2015

Dodd & Co Dairy BulletinRob Hitch

I’m writing this as the election results are being digested. The return of a conservative government might give some stability to the tax regime in the UK but the bounce in the value of sterling today shows that things might not all be rosy for the dairy sector.

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Continued pressure on milk prices, exacerbated by the rise of the £, is making life difficult for even the most efficient milk producers. Cashflows are under pressure and it is likely that many businesses not on supermarket contracts will see negative cashflows over the coming months.

At Dodd & Co we have seen a number of positive results from HM Revenue & Customs recently which I explain later. We also have the results of the online survey we ran about milk prices. Hopefully something of interest to you even in these difficult times.

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Tax Payments

The government announced that they would allow dairy farmers time to pay some of the large tax bills from 13/14 and 14/15 back in January. Money bags 2Unfortunately when we approached HMRC to negotiate time to pay deals at that time it was difficult, with questions about asset sales and approaching banks.

It is nice to be able to report that this week we asked to spread a Corporation Tax bill over six months, and this time, at the mention that the business was a dairy farm, HMRC advised us they had guidance for dealing with dairy farmers and allowed the six months to pay.

Clearly the messages espoused by politicians at the start of the year have now reached the Revenue, so if tax payments are likely to be a problem it might be a good idea to try and agree a time to pay schedule with HMRC before turning elsewhere.

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Plant & Machinery Claims

Financing infrastructure on dairy farms is increasingly expensive. Replacing parlours, cow sheds and the associated silage pits, slurry stores and cow tracks can run to several thousand pounds per cow place. Getting as much tax relief on expenditure to reduce the cash cost is therefore important to businesses.

Whilst slurry and silage pits qualify for relief automatically, what happens when they are integrated into buildings?

Machinery 2We have recently concluded a Revenue tax enquiry relating to a cattle building with underground slurry storage. We had adopted a fairly aggressive interpretation of the tax rules and claimed for a large proportion of the building. Despite HMRC raising various questions I am pleased to say that the Revenue agreed our interpretation resulting in no further tax being paid by our client.

So whilst relief on agricultural buildings, abolished in 2011, is no longer available, we are continuing to succeed in our arguments that much dairy infrastructure can be classed as plant. Particularly important whilst we still have Annual Investment Allowances of £500,000!

This can also apply to plant purchased with farms, although depending on how the vendor has treated their expenditure in the past claims by the new owner can be much reduced, or even non existent. Anybody purchasing farms should consider the capital allowances position in their enquiries before they agree the purchase of a farm.

If you are building new infrastructure, or buying farms and would like advice on how much of the costs may attract tax relief please speak to us before you commit to the expenditure.

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Dairy Survey Summary

We recently ran a survey of dairy farmers about what they thought milk prices might average over the next five years and what they thought their cost of production was.

Admittedly this was done in March at the end of a mini revival in global dairy markets. I have wondered what the answers might be if we repeated the questions now!

The headline figures are fairly straightforward; farmers expected milk prices to average 29.26ppl over the course of the next five years. Those responding to the survey also expected to be making money at these prices with cost of production (including drawings and tax) averaging 26.24ppl.

Personally I would imagine that the latter represents the average dairy farmers cost of production, although at Dodd & Co we see a significant range of costs of production around that average.

We also asked what type of system the respondents used (grazed/housed) and how long they intended continuing in milk production as well as how many cows they milked.

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What was interesting from these numbers was that there was very little difference in expected milk prices and costs of production. The range of milk prices expected by each group and their costs of production are shown above. These are averages of the respondents who described themselves in each category.We also asked what type of system the respondents used (grazed/housed) and how long they intended continuing in milk production as well as how many cows they milked.

The traditional all year round calving herds expected the lowest milk price but also represented 50% of the herds with less than 200 cows, so the lower price expectations may be due to volume related payments.

Whilst the traditional systems using block calving expected the highest margins, these respondents also had the lowest level of successors with only 38% of them having a successor. The next lowest group were the autumn calving grazers with 67% having successors. Housed and traditional AYR herds had successors in over 80% of businesses, with spring calving grazing herds at over 90%!

Businesses with successors could be broken down into two main groups, those below 200 cows where 67% of businesses had successors and those over 200 cows where 85% of businesses had successors.

Where will this drive the dairy industry in the next few years? It would seem that smaller autumn calving herds will be the ones leaving the industry. Will this lead to a greater preponderance of housed herds and spring calving grazing herds, or will milk pricing strategies such as seasonality payments prevent this happening?

If you would like to take the survey again now, click on the link here.

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Budget Number 2

Many of you may well have the livestock event pencilled in your diaries on the 8th July. Just to make the day interesting George Osborne is having his post election budget on the same day. Whilst tax give aways look unlikely a reduction in tax credits looks to be on the cards.  A move to universal credits for the self employed could be a big blow to farmers. We will be waiting to see if there are any changes that will impact farmers and let you know of anything important.

As an aside we have put in a submission for tax relief on agricultural buildings and underpasses, although we are not holding our breath!

If you would like to discuss any of the above or any other dairy industry matters please contact Rob Hitch by email on rob@doddaccountants.co.uk or tweet him @rob__hitch

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