Many farmers are paying too much tax and creating unnecessary cash-flow difficulties for their businesses, according to rural accountant Old Mill.

Although incomes have fallen this year, many farmers are still paying tax on forecast higher profits, following last year’s improved trading conditions. “While paying tax is often a sign of a profitable enterprise, paying too much tax starves businesses of cash flow, often at times when cash is particularly tight,” says company partner Mike Butler.

“Many farmers have had a reasonably profitable couple of years, leading to heavier tax liabilities. Hopefully, they will have taken advantage of tax planning opportunities like farmers’ averaging, use of pensions or perhaps creating limited companies to reduce that tax burden. Even so, many will still be paying tax on future profits on the assumption that the better times are continuing. Regretfully, that assumption is unlikely to be correct.

“Higher input costs and falling commodity prices mean that profits are likely to suffer for 2009-10 and possibly beyond. With most of the tax system based upon making advance payments on account, those farmers whose profits are falling should reduce their payments on account now.”

HM Revenue & Customs does not usually pay interest on overpayments of tax - and what little interest may be paid will generally come some eight months or more after the end of the tax year, according to Old Mill. “It is therefore far more sensible to act now to ensure you are paying the correct amount of tax, instead of waiting until you have prepared the year’s accounts, only to find that you need not have paid tax in the first place,” added Butler.

“There are of course other opportunities to mitigate tax if you are facing a profitable year, such as maximising tax relief on plant, equipment and building costs. The key is to have a strong understanding of your business’s position as you go along, and work closely with your accountant to identify the best way forward, before the end of the tax year.”