Farmers Averaging & Payment on Account reduction

Farmers Averaging & Payment on Account reduction

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I have a farmer client whose taxable profits for 2006/07 are £20,000, but fall down to £2,000 for 2007/08 so I can reduce payments on account.

Do I reduce them to NIL according to actual profits? I don't think so because I understand that, when I do average and submit 2008 tax return, HMRC will re-instate Payments on Account to tax liability of £11,000 and charge interest.

So should I reduce them to the tax due on averaged profits of £11,000? I think this is what I should do. I believe than I can't take into account the reduction in the 2006/07 tax because this can only be dealt with as a free standing credit when the tax return is lodged, which I think is odd.

Am I missing anything or is my understanding correct?

Kenneth

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