As the UK hurtles towards Brexit, now is the time to consider how you can best prepare your farming business or landed estate.
2017 sees the 406th anniversary of the first performance of Shakespeare’s The Tempest, at Whitehall Palace in London in 1611. A “violent windy storm” is a fitting analogy for 2017, a year that has been full of uncertainty and turbulence.
Centre-stage is Brexit, which continues to dominate the thoughts of many business owners as negotiators attempt to hammer out one of the most complex deals in recent history.
Although the final deadline for Brexit may be March 2019, landowners and farmers cannot simply wait for the final deal to take shape before deciding what to do next.
The adage “knowledge is power” has never been truer; well-informed landowners and farmers will be better placed to counter the risks ahead and take full advantage of any opportunities.
Understanding the nature of the problem
It would be surprising if landowners and farmers were not concerned. The Smith & Williamson Enterprise Index, which tracks sentiment among small and medium enterprises (SMEs), shows that they are anxious about Britain’s departure from the EU. The first step to solving a problem is to identify it, so here are a few potential pitfalls to be aware of:
- Cost control: Foreign exchange movements have been masking changes to the Basic Payment Scheme (BPS) and crop prices. The fall in sterling has increased the value of payments, while inflation is yet to bite for many input costs. The BPS is up around 5% on 2016, but if sterling strengthens, next year’s BPS could reduce: payments won’t simply be 5% higher. Given that DEFRA will replace the BPS with an unknown mechanism when the UK leaves the EU, and early indications suggest support payments are likely to be lower, keeping costs down will help to ensure your business can weather the transition.
- Access to workforce: As sterling weakens and other economies improve, there is less incentive for migrant workers to enter the UK labour pool. Potential immigration restrictions and negative public reactions to incoming workers could also have an impact.
Understanding the potential difficulties is the first part of the solution. The second is to take action to mitigate them. Here are some of the steps that can help you to adapt your business:
- Maximise communication with your bank. Your goal should be to ensure sufficient headroom to grow or diversify your business and secure long-term debt at favourable rates and with sufficient capacity to cope with leaner times.
- Revisit your accounts and make a forecast. Do you have up-to-date information on the running costs, revenues and profits of your farming business or landed estate? Timely accounting information is vital to effective planning.
- Consider profit averaging (two and five- year) to reduce tax liabilities, as well as how you can make use of capital allowances (for expenses such as investments in farming machinery) and lower-rate tax bands. You may see lower taxable profits, at lower rates of tax after claiming capital allowances, because the full cost of any eligible items might be fully deductible from taxable profits.
- Weigh up investments carefully Current headline prices for dairy products look strong, while lamb prices dropped significantly at the end of September. Farmers may be tempted to increase dairy production, but if that happens, expect to see dairy prices fall off a little as production increases, as has been seen previously. It might be a good time to think through your options: invest in a particular sector or system of production for the long term or change tack and diversify while prices for dairy livestock and equipment are good.
- Digital-ready Businesses must prepare for Making Tax Digital (MTD), which starts to come into effect into effect from April 2019 and will ultimately require every business to use the MTD system to comply with their VAT obligations and potentially report all income in the coming years. Only the smallest businesses are expected to be exempted.Cloud accounting services may be useful to help meet this requirement and putting appropriate systems in place at your own pace, ahead of MTD, could well be beneficial.
- Work out the indirect links between your cash flow, your use of allowances, and the tax you need to pay. For example, if cash flow is tight or profits are expected to fall, you need to be aware of the impact on capital allowances. Reduced cash for investment might mean less capital expenditure and therefore lower capital allowances. In this context, profits may appear to be reducing but taxable profits (and liabilities) could be on the rise. When in doubt, seek advice.
- Consider introducing partners where appropriate. The advantages of a partnership could include lower tax (since the partners are only taxed on their share of any profits, so lower rate tax bands might become available), as wells as more efficient use of labour and economies of scale.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.