farmers averaging 2 yrs profit

farmers averaging 2 yrs profit

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Hi - just want to clarify as HMRC details on farmers averaging (full relief) BIM73130 gives an example of profit reducing yet applying the averaging relief (why would it be in client interest to average in this situation).

Surely you would average only when farmer enjoying yr on yr profits?

Also as practitioners would you explain the detail to the farmer or would you just 'apply' it to the tax computation? 

Farmer 'friend' has asked me whether he should incorporate - and trawling this site as I do regularly I know that this is only one of many considerations!

Many thanks

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By David Massey
23rd Apr 2012 08:22

Avoiding higher rates
Jane

In the HMRC example the farmer would probably have has part of the profit taxed at higher rates in the first year but would still be well within the BR band in the second year. If the profits are averaged then, yes, the amount assessed in year 2 will increase but this extra tax/NIC would be more than offset by a credit in respect of the previous year. The credit is based on the difference between the tax/nic originally assessed and the lower amount that would have been charged on the lower, averaged, profits.

David

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By Jimess
23rd Apr 2012 09:24

Reducing profits good reason to average

As mentioned by the first post here, reducing profits are a good reason to average, but averaging should also be looked at where there are losses in one of the years to be averaged as this averages the one years profit (as the loss making year is deemed nil for averaging) across two tax years therefore gaining the benefit of both years personal allowances, plus the usual loss reliefs.  It is a very valuable resource and should be very carefully taken into consideration if the farmer does experience widely fluctuating profit levels.  If this is the case you need to do the sums to see what effects incorporation would have as averaging is not available to farming companies.

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By DMGbus
23rd Apr 2012 13:40

Tax Credits

Remember that for Working Tax Credits (WTC) and Child Tax Credits (CTC) averaging is disregarded.

It can be sometimes beneficial for WTC and CTC to make a full claim for Capital Allowances even if Personal Allowances are lost as a result, since the marginal tax rate for WTC and CTC is usually higher than for Income Tax + Class 4 NIC. 

 

 

 

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