November is usually a fairly expensive month on profitable dairy farms as it is the month that tax bills are paid.

I’ve yet to meet a farmer that likes to pay tax, but where one can afford to pay tax it’s probably a good position to be in.

I say ‘afford to pay’ because a high tax bill doesn’t always mean a high amount of free cash.

The classic example of this is when it comes to dairy expansion. Increasing stock numbers is very hard on cash because the value of the extra stock is shown as a profit on the accounts, even though they may not be producing any milk yet.

Secondly, cash is used up to get that stock on the ground, in terms of extra feed, vet and labour costs. The nail in the coffin is when in previous years surplus stock are sold which generates cash, but where the extra stock are retained that stock sales income just isn’t there.

Company structures

More and more farmers are moving towards company structures, but these aren’t for everyone either. The company has to pay tax and the shareholder has to pay tax when money is taken out of the company.

The big advantage of the company is the director’s loan. This is the assets the company directors loan to the company at incorporation. These usually include stock, machinery and equipment but usually not land.

Effectively, the farmer sells these assets to the company and is able to get the value of these assets back tax free at a later date. However, once the director’s loan is gone it’s gone.

Land is usually not included in a director’s loan as selling land to a company may pose inheritance and succession issues at a later date.

Profitable farms

On profitable farms with good cash flows it may be more sensible to stick with sole trading rather than go down the company route, particularly where drawings are high such as children in college, mortgage repayments etc.

In other circumstances, the company route is much more beneficial at reducing exposure to tax. At the end of the day it’s important to seek expert tax advice tailored to your own farm.

Tax advice is not necessarily the prerogative of your accountant. There are specialised tax advisors who will be able to help you to reduce your tax liability and these people can instruct your accountant on your behalf.

Tax advice and accountancy are two different roles.