From the 2024/25 tax year, cash accounting is the default method of calculating trading income if you operate on your own or in partnership with others.
An election can be made to switch to the traditional ‘accruals’ basis rather than the cash basis, although companies will still use the ‘accruals’ basis.
Under the cash accounting method, farmers can receive tax relief on costs in the year they are paid, rather than waiting until the following year when the related crop sales occur. For example, if you spent £50,000 on fertiliser in September 2024, these can be deducted for tax in the 2024/25 tax year.
Similarly, cultivation costs for the following year’s harvest can also be deducted for tax when they are paid. This change in accounting method allows farmers to claim tax relief in the same year that expenses are incurred, potentially resulting in a tax loss in the first year of application, which could lead to a tax refund.
Under the cash basis, your accounts may not accurately reflect your financial performance, leaving you uncertain about your business’s actual standing. You’ve likely experienced the frustration of reviewing your annual figures with your accountant, only to question their accuracy. Your accountant may explain that your accounts are prepared on an accruals basis, meaning they include income from various harvests when the crops are sold, rather than when they’re harvested.
While this concept may seem clear initially, it often becomes murky by the time you revisit your accounts the following year. Consider preparing two sets of accounts: cash accounts for tax purposes and harvest year accounts, which incorporate precise yields and crop prices, offering a clearer understanding of each season’s profitability and ensuring tax efficiency.
In essence, the shift to cash accounting for trading income starting from the 2024-25 tax year brings significant advantages for farmers, enabling them to deduct input costs in the same year they’re paid.
This approach not only streamlines tax procedures but also provides a more accurate reflection of financial realities, eliminating the frustration often associated with accruals-based accounting.
By embracing this change and perhaps considering the dual approach of maintaining both cash and harvest year accounts, farmers can navigate tax obligations more effectively while gaining deeper insights into their seasonal profitability.
Ultimately, this shift represents a step towards greater transparency and efficiency in agricultural financial management.
Get in touch with our team today to find out how we can help make your agriculture accounts more tax efficient.