There is an old joke about a mathematician, a statistician, a stockbroker and an accountant. In response to the question “what is two plus two?“, the mathematician replies "four." The statistician will tell you it is 95% probable that the answer lies between 3.98 and 4.02, the stockbroker asks, “buying or selling?” and the accountant simply says, “what would you like it to be?”
The taxable profits of a farm in the transitional period could well fall into the last description. Whilst the general thrust of the calculations for that period is now fairly well established (all the profits for basis periods falling into 2023/4 with a spreading relief for the excess of the transitional profits above the “normal” profits), there are a number of planning permutations, each of which will give a different answer. The reasons for this include:
- Many farms have non-fiscal year-ends so will fall into the transitional calculations when determining their 2023/4 taxable profits
- The legislation would permit a shortening of the current accounting period, which would effectively make 2022/3 the “transitional” year, albeit without spreading relief
- Farmers have the advantage of five-year averaging, both backwards and forwards, which is itself a comparable but different sort of spreading relief
- Farmers (particularly arable farmers) carry a considerable proportion of their annual turnover and profitability in stock and, since the profit is only realised at the point of sale, can determine whether that recognition falls into one period or another
- Farmers are heavy investors in plant and machinery and the timing of such purchases/sales can also materially alter the taxable profits for any one year
By way of example, consider the following scenario: A two partner partnership has a 30 September year end and generally achieves a gross margin of £200,000. Overheads are consistently £120,000 and all the crops are normally (but not always) sold around the end of March. The farm is well capitalised and has no urgent need to sell at any particular point – this year in the light of market volatility they have not yet agreed any forward sales.
The table below demonstrates that taxable profits for 2023 could be £80,000 or £220,000 whilst those for 2023/24 could be £120,000, £220,000, or £80,000. If one took the examples further, exploring what might happen if there were a change in the businesses marketing policy so that some or all of the crops were sold after the end of the fiscal year (either in 2023 or 2024), the range of outcomes doubles. If one factors in the effect of spreading or averaging both backwards and forwards, there would be about 20 possible permutations.
Clearly, in the real world, profits do not accrue evenly (particularly in recent years), we know that the phasing out of subsidy will have an impact, these examples ignore the controllable use of capital allowances and generally clients will opt for the optimum cashflow outcome which probably come from simply following the basic transitional rules. Nonetheless, switching to a fiscal accounts year has the merit of simplicity (and reduces the timing pressures or need to file provisional results) so this should at least be considered. Moreover, where clients are in different marginal tax rates from one year to another or where circumstances alter, such as a partnership change, new income sources appearing or existing sources disappearing after 2023/4, the position will need to be considered. At that point, it will be essential to consider all the options, including whether to opt for a fiscal year end in future and whether spreading profits forward is better than averaging backwards. The pragmatic approach may be to prepare draft accounts on a quarterly basis, up the filing date, and only submit them when the optimum year end becomes clearer.
Option 1 - keep 2023/4 as the transitional year
| Accounting period | Gross profit | Overheads | Net | Basis period |
| 31/03/2022 | 200,000 | 60,000 | 140,000 | 2022/3 |
| 30/09/2022 | 0 | 60,000 | -60,000 | 2022/3 |
| 31/03/2023 | 200,000 | 60,000 | 140,000 | 2023/4 |
| 30/09/2023 | 0 | 60,000 | -60,000 | 2023/4 |
| 31/03/2024 | 200,000 | 60,000 | 140,000 | See below |
| 30/09/2024 | 0 | 60,000 | -60,000 | See below |
The profits for 2023/4 would either be those for the end September 2023 and 50% of the following year - i.e. £80,000 plus £40,000 = £120,000, of which £40,000 could be spread, or those for September 2023 plus the six months to March 2024 - i.e. £80,000 plus £140,000 = £220,000, of which £140,000 could be spread.
Option 2 - make 2022/3 a fiscal year
| Accounting period | Gross profit |
Overheads | Net |
Basis period |
| 31/03/2022 |
200,000 |
60,000 |
140,000 |
2022/3 |
| 30/09/2022 |
0 |
60,000 |
-60,000 |
2022/3 |
| 31/03/2023 |
200,000 |
60,000 |
140,000 |
2022/3 |
| 30/09/2023 |
0 |
60,000 |
-60,000 |
2023/4 |
| 31/03/2024 |
200,000 |
60,000 |
140,000 |
2023/4 |
| 30/09/2024 |
0 |
60,000 |
-60,000 |
See below |
The profits for 2022/3 would be those for the year end September 2022 and period to March 2023 - i.e. £80,000 plus £140,000 = £220,000, which could be the subject of various averaging claims. The profits for 2023/4 would be those arising in that year (£80,000) because the accounting and fiscal years would be aligned.
*The views expressed are the author's and not ICAEW's.