Capital allowance highs and tax credits lows

In the last few weeks I have come across the situation where clients who have been claiming tax credits face the prospect of having to repay all of their 2011/12 and 2012/13 credits amounting to over £10,000.

This has arisen as businesses have in recent years replaced plant and machinery making use of the very generous 100% capital allowances that are available, until recently on expenditure of up to £100,000 per year.

Those that have used these allowances in recent years to reduce their taxable profit have benefited from low, or no tax bills, and for families, significant tax credit claims.

Well now those that became hooked on 100% capital allowance claims are suffering from withdrawal symptoms!

Once you have claimed all the value of a tractor, pickup etc there is nothing left to claim in future years. With no capital allowances to claim taxable profits are increasing significantly, even when the profit on the face of the accounts is similar to previous years.

With increased profits come tax bills and recalculation of previous years tax credits, in a couple of cases I have seen in the last few weeks the total tax, payments on account, and tax credits repayments have equated to between 50%-100% of profit on the accounts!

This issue will be come much more widespread with lower allowance claims this year.

So if you have been benefiting from a capital allowance high make sure you come off it slowly to manage cashflow!

If you want to know what you can do about it get in touch.

rob@doddaccountants.co.uk

Follow on twitter @Rob__Hitch

Football and Milk Contracts - Thoughts from Rob Hitch

Well it's been such a long time since my last blog but I felt compelled to write something following an evening watching my home town team, Tranmere Rovers. 

I have been in discussions recently with dairy farming clients, and non clients, along with various other industry bodies and commercial organisations, namely NFU, SNFU, FFA, and Kite.

Many of these discussions have revolved around using a Cost of Production (COP) model to determine milk prices. Last week I was invited by Farmers for Action to a meeting with a middle ground milk processor selling liquid milk. We were discussing COP models and whether or not they could be introduced across the board.

The existing COP models are run by large supermarkets who use them to show they care about their suppliers. Will they ever be anything more than that?

After watching my team, Tranmere Rovers, (now top of the league after two games!), beat a Carlisle United team 3:0 I wondered whether or not Carlisle, and Tranmere, would benefit from a cost of production model too. After all if they could drive up costs, which were covered by the purchaser, they could sign Fabregas, Iniesta and anyone else and successfully challenge in the Champions League!

The only downside to this master plan would be that instead of paying £22 to watch Carlisle host Tranmere I may well have had to pay several hundred thousand pounds!

This is the crux of the problem facing dairy farmers in looking for COP contracts. COP models remove the need to be competitive on the world stage. What would happen if you lost your COP contract and ended up selling milk at world prices? 

Will exposure to the market drive farmers to adapt quicker to circumstances. In previous years when milk prices have fallen to often regarded unsustainable levels quite a lot of businesses have sustained losses, many of the better ones however have returned to profitability quicker and with an improved business.

If all milk was sold on COP models then every purchaser would compete on the same terms and all would be rosy. Unfortunately we can't control the import of foreign milk from Ireland or Belgium, never mind butter, cheese and powder from anywhere else in the world. It seems inconceivable that cheese producers would buy milk on a COP contract, if they don't then what will stop them selling milk cheaply into liquid when they don't anticipate returns from cheese?

The answer surely has to be to make the processors more responsible for their own profits, I.e. they should buy and sell milk, not just sell it and reduce the raw material cost when they have done a bad job of selling! The only way that processors will be forced to address this issue is with fairer contracts with shorter notice periods. Not notice after a price reduction but three months notice at any time.

In the long term this needs to be backed up by more world class processing facilities that can process more UK milk and open up the potential exports that are so often talked about.