Some of the gloss will be taken off the year with inflation and supply pressures leading to a substantial increase in input prices in the last quarter.

This will have a major impact in 2022 and proper budgeting and cashflow management will become a necessity.

If you are in the tillage sector you will suffer an immediate impact on winter crop planting in that the extra costs of inputs will wipe out the gains in prices for your crop.

Remember the balance of 2021 (this financial year) tax falls due in 2022, so be aware that the overhang of the 2021 liability awaits in October/November 2022.

The first thing you need to do in tax planning and managing the tax bill is to ensure that you pay the correct amount of preliminary tax in 2021, which will probably be 100% of the 2020 liability.

Banks don’t lend for tax bills as a rule but will lend for working capital – so it is something to keep in mind

This will more than likely be lower than the final 2021 liability.

If you have surplus cash, consider paying extra in the preliminary this year to reduce the hit in 2022.

A controversial but wise move is that the tax has to be paid and the interest rate charged by revenue in the future is approximately 8%.

Banks don’t lend for tax bills as a rule but will lend for working capital – so it is something to keep in mind.

No one likes paying tax but it must be paid where there is a liability.

Now, back to tax planning and what you can do – with higher incomes, higher tax is always on the agenda.

If you have a high tax bill but no money (cash) then you need to look at why this is the case. Where did the profit go?

Tax planning is not some high-brow elaborate planning mechanism. It’s revisiting the basics and the reliefs and ensuring all is done that can be done to minimise your tax.

Laying a solid foundation will help in setting up the business for a structure review.

While you may not have money in the bank, higher profit leads to higher tax and proper planning is necessary.

If you have a high tax bill but no money (cash) then you need to look at why this is the case. Where did the profit go?

Profit is the amount of money after all day-to-day expenses are paid and is the amount available to service:

  • Living expenses.
  • Reinvestment: money spent on machinery or buildings out of cashflow.
  • Bank repayments.
  • Pension payments.
  • Tax bills.
  • Remember, as a single person, you can only earn €16,500 before income tax, but you will still have a liability to USC and PRSI of approximately €922 at this level.

    As a married person, €24,750 is the amount you can earn before income tax kicks in but, again, you have a liability to PRSI and USC of €1,435 to pay.

    Now, ask yourself, can you as a single/married person live on €317/475 per week to include mortgage, heat, light, house insurance, motor, clothing, food, entertainment, etc?

    Then compare this to the profit you make. In effect, the difference is what you pay tax on and, as a result of this, you have eaten into the cash available and end up paying tax on money already spent.

    What farmers can do to immediately reduce tax bills

    If you are at the low rate of tax every €1,000 spent will save €285 whereas if you are at the 52% rate, every €1,000 spent will save €520.

    The first thing to look at is the adjusted profit on the farm, ie it’s the profit that will be taxed.

    This is commonly known as looking inside the farm gate. Then look outside the gate.

  • Can this profit be reduced?
  • Have you examined the personal addbacks – could they be a lower amount?
  • Are there items in as capital which could be repairs?
  • Are you entitled to stock relief?
  • Have you paid and claimed family wages?
  • Have you looked at the option of income averaging?
  • Are there any items of capital expenditure that qualify for 100% accelerated allowances?
  • Have you claimed all your tax credits – medical expenses being the one often forgotten?
  • Look at paying into a pension plan – as well as reducing your tax, it will also have an effect on preliminary tax and provide a fund for retirement.
  • When you have this review done, you have done all that can be done for 2021 at this stage.

    Looking back is more difficult than looking forward.

    Short-term tax tips

    Let’s look ahead and see what you can do now and in the next one to three years.

    The starting point again is inside the farm gate and revisiting all the basics. You have time before the end of year to:

  • Bring in family and pay them a commercial wage.
  • Maximise the lower tax band if commercially sensible.
  • If your spouse is working off farm, utilise any of the second income tax band. Topping up their income earned to €26,300 might be an option.
  • If a child is leaving the farm to work full-time – could you pay them a termination payment?
  • Do any necessary repairs.
  • Could you invest in renewables or replace items that qualify for 100% capital allowances in the year – lighting, variable speed drive pumps, solar panels, etc.
  • Extending period of accounts: if accounts are due at year-end maybe explore moving close date to allow for more winter costs.
  • Would stock relief be an option?
  • Could you buy stock before the year-end?
  • Would income averaging work?
  • What capital work /machinery or buildings can you do before year-end. Only one-seventh or one-eighth of this cost is written off this year.
  • Would bringing your spouse in for a salary reduce tax?
  • Pay your employees a bonus tax-free by using the small benefit scheme – up to €500 tax-free. Consider your pension and employees.
  • Examine and review all tax credits, especially medical expenses.
  • Review your structure and examine if a partnership or limited company would work and examine these options.
  • Could you hive off part of your business into a company, eg the machinery and carry out a contracting operation for the farm?
  • Reduce tax in the long term

    The longer term offers a chance to look at the structure and succession.

    If you are 50 or over, succession should be in your mind when looking at the business. Take a hard look at the business and see what capital investment is necessary and what it will cost.

    If substantial investment is needed, this could take care of the tax bill for a number of years.

    Look at your structure to see if a partnership or company is the next and most obvious step.

    If you are trading through a limited company consider most, if not all, of the main income tax planning tools pointed out above. As a director of the company, consider:

  • Paying the small benefit amount of €500 to the directors and employees.
  • Ensuring your children are in for wages where they justify same.
  • Reviewing whether you are due any money for travel and subsistence.
  • Paying into a company pension fund – this must be paid by the year-end.
  • Paying a matching contribution.
  • Providing yourself with benefits by being a director and letting the company pay the cost and ultimately get a tax deduction.
  • In short

  • Tax is a fact of life.
  • With the low level of income that one hits, the high tax rates won’t eliminate your tax liability but will minimise same.
  • Paying the minimum amount of tax is something everyone should aspire to by making sure reliefs and credits are claimed.
  • On a separate but important issue, please ensure you have a will drawn up and regularly update it.
  • Bring this conversation into your annual accounts review meeting.