AT THIS time of the year, many farm businesses are in contact with their accountant, particularly if they trade as sole traders or in a partnership, as January 31 is an important date, writes Omagh Accountant Seamus McCaffrey in this month's column.

This is the date by which the returns must be filed, but it is also the date by which tax requires to be paid.

Sole traders and partners in a partnership pay tax in two instalments: January 31 and July 31, annually.

By this January 31, sole traders and partners in a partnership are required to pay the balance of tax outstanding from the previous year, and a payment on account for the current year.

The requirement to make a payment on account only arises if the total amount of tax payable in the previous year was in excess of £1,000.

The amount of the payment on account to be made is normally 50 per cent of the liability of the previous years.

However, if the farmer considers that the tax liability for the current year will be less than the liability for the previous year, the farmer has the right to pay a smaller payment on account by January 31.

The calculation of the lower payment on account requires careful consideration and detailed consultation with the farm’s accountant.

Paying too small a payment on account may result in an interest charge by HMRC from this February 1, if the actual liability for the current year exceeds the estimated payment on account made by January 31. Monies received in respect of Covid-19 are taxable.

There are many tax planning opportunities for the sole trader or partner in a partnership to consider at this time of year.

These include profit averaging, either the two-year or five-year options; utilising farm losses in the most cash-effective way; reviewing business structure to ensure the tax allowance of a spouse is availed of; and, if family labour works on the farm, that this expense is properly recorded in the farm records and fully claimed as a business expense in the annual return filed with HMRC.

Where a farmer’s son or daughter is employed on the farm, and is attending a full-time course in agriculture, payments up to £15,480 to the employee for the current academic year may be paid free of tax and National Insurance.

In addition, the payment will constitute an allowable deduction in arriving at the farmer’s tax liability.

This is an attractive incentive to bring new skills into the farming business, as well as the cost being tax-allowable, if the conditions are met.

It is important that time is allocated to calculating the least but correct amount of tax to be paid by the January 31 deadline, and managing payment to farm suppliers: feed, fertiliser and contractors.

Where possible the objective should be to achieve all of these without adding to the business overdraft.

The techniques relevant here are updating the farm cash flow forecast, including Covid-19 monies, discussions with family members involved in the farm and with your accountant to best position the farm to manage cash flow, pay down suppliers and cope with volatility.

If the farmer is unable to pay the tax liability due at January 31, it is possible to agree a ‘time to pay’ arrangement with HMRC, provided Tax Returns have been filed.

The request to HMRC must be done before the due date to pay the tax, and, if the arrangement is adhered to, no penalty is charged, but interest is payable.

The above are examples of tax planning opportunities which will assist in managing tax liability.

In order to take advantage of these opportunities, it is necessary to have year to date figures available, including Covid-19 monies received, and to maintain regular contact with the farmer’s accountant.