The tax year 2016/17 was the first year in which it was able to average profits over a five year period. We have undertaken a review of the claims that have been made and, whilst not every farmer has been able to benefit, some of the reductions in the overall tax liability have often been in excess of £10,000.
The reasons why this has occurred are:
Capital allowances Claims
The normal time limit for making capital allowance claims is two years and, once this has passed, no changes to the claims can be made. However, one of the aspects of the five year averaging claim is that the time limit for amending capital allowance claims is now extended to five years. We have therefore been able to use the benefit of hindsight and there have been a significant number of occasions when claims have been changed to enhance the tax reduction.
The same principle applies to loss claims where the two year time limit can be extended to five years. We already have several possibilities with loss claims where they can be carried forward for offset against future profits or offset against other income for the same or previous year. Once again, hindsight has enabled us to amend claims in appropriate circumstances. We have also been able to change the capital allowance claims to either enhance or reduce the loss if this is of benefit.
Two year averaging claims
We have always had this ability and this still remains an option. There have been occasions when the two year averaging claim still remains the best solution.
Consideration can be given to subsequent years as it may be able to reduce the taxable profits of the farm where the purchase of machinery occurs. The purchase should always be made for commercial reasons rather than be driven by tax benefits. However, where the two can combine then benefits can still arise. Whilst there is no substitute for performing the actual calculations it is unlikely for any benefit to arise where an individual is a basic rate taxpayer and has fully utilised their personal allowances.
The benefits have been significant in the appropriate circumstances and have often exceeded £10,000 and, in some instances, have been substantially higher. We will, of course, continue to monitor the situation for our clients and where anyone wishes to consider their options then we would be only too happy to help.