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Huge Tax Liabilities on the Horizon

There could be a very painful shock in the offing for many unincorporated farmers according to Larking Gowen agricultural partner, David Missen.

David Missen

David Missen, Larking Gowen Agricultural Partner

“One of the consequences of the tax system is that changes are often announced long before the effects make themselves felt; this is particularly pronounced for the self-employed,” said David.

The reduction in Annual Investment Allowance (AIA) which was announced in the 2011 Budget will only really make itself felt in January 2014. At the same time, the taxation of child benefit which was announced in the 2012 Budget will also begin to bite. This position is further compounded in that for some, the withdrawal of AIA might even mean that the taxpayer could lose their personal tax allowance.

For example, a farmer who had achieved a profit of £160,000 per annum but reinvested £100,000 back into plant and machinery would have been paying, in recent years, about £8,700 every six months in tax and national insurance. This will continue in January and July 2013 because his payments for 2012/13 will be provisionally based on the tax paid in 2011/12.

The actual liability for 2012/13 will be about £46,500 – nearly three times the liability for the previous year, although the business is no more profitable. If he has two young children, there will be an additional child benefit clawback of £1,800 so when one takes into account the first payment on account for 2013/14 he could face a tax bill of almost £55,000. In cash flow terms this represents almost all the cash remaining in the business.

Commented David, “This tax is likely to affect all significant unincorporated businesses to a greater or lesser extent, although clearly the size of the fluctuation will depend on personal circumstances.”


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