Farmers and tax
Many farmers are in trouble with tax payments this year.
The issue is that as a result of 2011 being a year of rising profits, a farmer will get hit for a hefty balance of tax owing for 2011 and worse again, high preliminary tax owing for 2012.
The amount normally recommended to be paid in preliminary tax, to avoid interest on underpayment, is based on the return for the previous year, and therefore a lot of taxpayers will have paid preliminary tax in 2011 based on year 2010, which was a year of lower profits on most farms.
The following example shows how it is so easy to get caught out by our current tax system.
A farmer has €30,000 income in 2010, and €40,000 in 2011.
In October 2011, he paid €6,730 in preliminary tax for 2011 (based on his 2010 accounts).
In 2012, he owes a further €3,820 for 2011, because 2011 turned out better than 2010.
The total paid for 2011 is €10,550, made up of €6,730 paid in 2011 as preliminary tax, and €3,820 paid in 2012 as a balance for 2011.
The standard advice would be that he should pay another €10,550 in preliminary tax now for 2012, based on the final outcome for 2011.
The combined amount payable in 2012 is €14,369.
So, having earned an extra €10,000 in a year of extra high profits, the farmer is caught for tax payments of €14,369, a whopping €7,639 beyond his tax payments in a "normal" year.
The problem is that most people tend to spend according as they earn — and many farmers won’t have prepared adequately for this.
The system is also particularly tough on a farmer who spent the extra income in 2011 on machinery or farm improvement, because these costs won’t shelter much of his income, as they are allowed for over a period of eight years.
So what can be done, if a farmer is facing a tax bills without the ability to pay? There are different strategies for different circumstances.
Needless to say, ignoring the problem isn’t recommended, because non-filing of a tax return results in automatic penalties.
As a general rule of thumb, a farmer should clear the balance owing for 2011 before considering preliminary tax for 2012.
If the balance for 2011, is not paid and simply ignored, Revenue final demands and sheriff notices are likely to issue fairly promptly.
Firstly, a farmer could consider making pension contributions.
If you are taxed at the higher rate of tax (41%), this means that every euro you put into your private pension pot will save you 41 cent from your 2011 tax bill. The preliminary tax payable for 2012 can be reduced accordingly, still based on 100% of the final 2011 liability.
I will discuss the rules on pension contributions here in the coming weeks.
The downside with using pension contributions to shelter your tax bill is that they too absorb your cash, and may not be financially viable, as a result.
Secondly, a farmer could choose to pay a lower amount of preliminary tax for 2012, given that 2012 is likely to be a worse year for profits than 2011.
This is a risky strategy, because Revenue can impose interest if insufficient preliminary tax is paid.
Thirdly, if not already in income averaging, a farmer could consider this as an option.
For most farming operations, 2011 was a better year than 2009 and 2010, and opting into averaging will help reduce the profits for 2011.
If it’s not financially possible to clear the balance owing for 2011, a farmer can request an instalment arrangement with Revenue. This is a concession which allows a taxpayer to pay their liability over a period of time.
For any farmer facing a tough time with tax bills, it’s usually worthwhile discussing your options with your accountant in order to come up with the best solution for your circumstances.
As always, tax advice should be tailored to the specific circumstances at hand.