Cows & Money: June 2016

Dodd & Co Dairy Bulletin 

With milk prices being cut every month, recent talk of markets turning as production falters, notably as a result of a poor spring and heavy culling, might seem hard to believe. Let’s hope that we see some upturn in prices before people have to house cows this autumn.

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At present however prices are at a low point and pretty much every dairy farm business with a non-aligned contract is under significant cash pressure, as our latest cost of production figures show. The old maxim ‘cash is king’ is certainly key at times like this. With that in mind, in this edition of Cows & Money we look at some of the implications of recent and proposed changes to tax law and HMRC practice that are having an impact upon our clients.

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2015/16 cost of production

Interim figures from our clients with accounting year ends between November and January highlight the cash pressure that farmers are facing. Milk prices in the sample have fallen by 7.4 ppl to 23.23 ppl, and we expect it to be lower again in March/April year end accounts. This has wiped a massive £185,000 from our average client’s milk income.

Although costs have fallen, after tax and drawings this leaves a deficit of 2.63ppl.  Even adding back depreciation, businesses are still losing 0.19ppl, before any capital expenditure or debt repayment. Clearly in this situation the average dairy farm will have been suffering a cash shortfall for many months now so any further pressure on cashflow could be catastrophic for some businesses.

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Annual Investment Allowance – the sting in the tail

In recent weeks I have had to explain to a number of clients that despite lower profits in 2015/16 they have bigger tax bills than 2014/15!

But for most people the simple explanation is the availability of capital allowances.  In most cases Dodd & Co write down the value of plant and machinery 15% per year on a reducing balance basis.  Unfortunately for tax purposes we don’t use depreciation but capital allowances.  If the rate of capital allowances is different to the depreciation charge we get different accounting and taxable profits.

So in good years when cash is plentiful and farmers replace machinery, tax is low, but in poor years when capital spending is reigned in, tax can potentially be higher.

If we look at the example below you can see how this works, we have assumed that in 2014/15 £70,000 of allowances are available, but just £5,000 in 2015/16.

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For a family partnership of two partners this means an additional £4,350 of tax and national insurance. As you can see in the example above, the taxable profit is 50% higher in the second year, even though the accounting profit has fallen by 80%!

If you would like to know more about capital allowances speak to your usual Dodd & Co contact.

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Tax credits – aren’t they meant to help in times like this?

For many people, particularly those with young children, tax credits have provided much-needed income over the years. The amount of credit you get is based upon the taxable income, including farm profits, of families.

Awards are usually made based upon income of the previous year, but can be changed to current year income if this increases.  Any fluctuations below a threshold are ignored. This used to be £10,000 but reduced to £5,000 several years ago.  From 2016/17 onwards the threshold will be even lower (£2,500).

If we use the taxable profit figures in the example above, and assume our family consist of two parents and three children then in 2014/15 our family would have been entitled to tax credits of £3,874.

2526462_lBecause awards for 2015/16 are initially based on 2014/15 income, the rate of payment of tax credits will continue at this rate until submission of the annual declaration, due at end of July 2016.

In our example above however, taxable profit increases by £15,000, well above the £5,000 disregard, meaning the 2015/16 award is recalculated. This will lead to a reduced award of £NIL. As the family have been overpaid, this means about £5,165 will have to be repaid, assuming the payments are stopped in July 2016. But any credits paid in 2015/16 will technically be overpaid.

So if our family have been claiming tax credits, based on the accounts above they will find they have additional tax, national insurance, and repayable tax credits of at least £9,515! Just what you need when cashflow is tight. Given that some people, who will still be receiving high levels of payments based on 2014/15 income, don’t have to provide 2015/16 income details until 31 January 2017 (tax return deadline), this figure could be an understatement.

As mentioned above, the income increase threshold is now £2,500.  This means it’s very important to discuss current year investment in equipment and machinery with us when we complete your accounts for the previous year.

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Building a resilient dairy business

Following a well-received seminar held in conjunction with Aspatria Farmers, Kingshay, and AHDB Dairy, we are holding two more, in Penrith on 20th June and Carlisle on 22nd June.  Both evenings begin at 6.30 for a 7pm start. For more details about speakers and content, and how to book your place please click here.

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And finally…

On a cheerier note, the last few weeks have brought dry sunny weather for most of our clients who have we hope been making the most of having cows out to grass and making good silage.

Hopefully you now have a bit of time to enjoy the early summer.  We will be out and about as the show season gets under way with a presence, or attending the following events;

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So if you want to talk to us about anything in this edition of Cows & Money, please come and find us.

Rob Hitch

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