Cows & Money: September 2015

Dodd & Co Dairy Bulletin

Well, the year so far has been a bit of a roller coaster! We started with falling world prices, then a quick increase before the markets plummeted, dragging down UK milk prices. The action taken by Farmers for Action has in the last weeks led to retailer announcements to pay guaranteed prices for some liquid milk and cheese which is to be welcomed.

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However this looks unlikely to prevent the two tier market place that we currently see in the UK, with liquid and some cheese processors paying good, often cost of production based prices, whilst other commodity processors are paying prices much more in line with world and European prices.

How this plays out over the next twelve months, and what the implications are for profitability of dairy farms on various contracts, will be interesting to see. In this edition of Cows and Money we consider the implications of preparing accounts early and the effects of weather on overall profitability.

We will be at the UK Dairy Day tomorrow so if you’re there and would like to discuss any of the points raised below pop along to our stand, just behind the commentary box, at the main ring and say hello!

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Accelerating loss claims and averaging

For many dairy farmers the 2014/15 year was pretty good; as whilst milk prices fell so did costs of production due to a very good year from a weather perspective.

The downside of this is that there are some substantial tax bills due at the end of January, at a time when many businesses are running a cash deficit. For some paying this bill may prove a substantial feat. So what can be done about it?

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HMRC have indicated they will look favourably on requests for payment plans, but spreading the tax still means it is payable. It is likely that for many the 2015/16 year will deliver substantially poorer results. Once the 2015/16 tax return has been completed then it is possible to carry back any losses, or use farmers’ averaging to reduce the 2014/15 tax liability.

Most farmers understand this, but may not be aware that it is also possible to make these claims on your 2014/15 tax return – although to do this you must have final 2015/16 accounts.

For some people it may be worth preparing a set of accounts for a short, say 7-8 month, period before the end of January to make theses claims now and reduce the tax due in January 2016?

Each businesses position will be different, depending on its own costs and the milk price achieved so far throughout 2015. For some however this may be a worthwhile exercise in order to reduce the tax liability and keep hold of cash.

Don’t forget though that if you change a year end from March to September, you are likely to have a large increase in silage stocks, which will need to be brought into your September accounts, so review management data carefully before making any decisions.

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Costs of production

As many readers will know, Dodd & Co prepare annual cost of production figures for use by our clients. These are compiled from a selection of dairy businesses with Spring year ends.

Money bags 2The data for the 2014/15 year has now been prepared and we have seen a small reduction in costs of production.  Unfortunately milk prices fell as well, even before the impact of the hefty price cuts we’ve seen this summer.

What the figures do show is the impact of bad weather on performance. Surplus in the last year was 2.35 ppl compared with 0.47ppl back in 2012/13, this despite the fact that milk prices were only 0.54ppl higher. That said, in 2014/15 we still saw the average cost of production above 27.5ppl.

Whilst we may see some reductions in feed costs this year, driven by lower prices and less use, it is hard to see average production costs falling below 25ppl. What we also see is a range either side of this level of some 7.5ppl, with the best operators at around 20ppl and the poorest at 35ppl!

We take this figure to be the cost of maintaining your business in its current state, not to expand (or repay debt in excess of annual depreciation charges). This is not the same as a cash position which could be higher or lower depending on capital commitments. Understanding these distinctions will help businesses plan for the future if volatile milk prices are to continue.

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Another nail in the coffin for corporate partners

The Annual Tax on Enveloped Dwellings (ATED) is an annual charge on companies which own properties which do not fit within certain exemptions.  The exemptions are aimed at property rental businesses, dwellings occupied by qualifying farm workers (including the farmhouse) and buildings open to the public.  ATED only initially applied to dwellings worth £2m.  From 1 April 2015 it applies to dwellings worth £1m and from 1 April 2016 it applies to dwellings worth £500k.  So the fishing net is getting more tightly drawn all the time!

The interesting – somewhat quirky and unfair – thing, is that ATED applies not only to companies which own properties themselves, but to companies which don’t own property themselves but are corporate members in partnerships which own property! ATED is charged in full no matter how small the corporate member’s interest in the partnership is.

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And even if the property involved fits within one of the exemptions so there is no charge, the exemption has to be claimed so an ATED return has to be filed.

Add this to the changes to Entrepreneurs Relief for corporate partners which came into effect on the 1st Budget day this year (18th March) plus the rules prohibiting “excess profit allocations” for mixed member partnerships (in force since 1st April 2014) – and of course the fact that partnerships with corporate members cannot claim Annual Investment Allowances – and you can see that corporate partners have well and truly had their (tax) day!

If you would like to speak to anyone about any of the above please contact Rob Hitch on 01228 530913 or email rob@doddaccountants.co.uk

Alternatively tweet him @Rob__Hitch

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