'Be wise and face up to farm losses early to get the situation under control'

Tough financial times on the farm can be compounded by a number of issues coming together concurrently – poor harvests, poor commodity prices, losses over successive years, tenants struggling with cash flow and rent payments, rising prices for fertilizers and so on.

What steps can be taken to plan for these lean times?

David Chismon, Director with UK chartered accountants Saffery Champness and a member of the firm’s Landed Estates and Rural Business Group, says: "Acknowledging the gravity of the situation is vital, planning is crucial.

"While some setbacks may be unexpected, others can be managed. So, for example, talk to your accountant and your bank manager early to discuss extra borrowing if it looks like this will be required.

"Draw up a realistic all-entity budget and cash flow that includes payments for tax, and includes contingency for, for example, late receipt of Basic Payment Scheme entitlement.

"Be sure which finance costs are fully tax deductible, which they may be if they are required to meet business expenses.

"There may be restrictions to basic rate tax relief from April 2017 onwards where attributable to the letting of residential property."

Rules for hobby farming also require careful consideration. These prevent sideways loss relief (ie setting losses against other income) in the sixth consecutive year of losses.

This means that by the fourth year of losses, a profit will need to be made in one of the remaining two years or future losses will not be able to be set against other income until a farming profit is made.

David Chismon says: "It is possible for sideways loss relief to continue beyond a sixth year of losses if a competent farmer could realistically expect future profits to be made.

"However, HMRC has a reputation for being extremely tough in such situations.

"In such cases it would be wise for hobby farmers to review their farm strategy, cost control and timing of income receipts so as to make a genuine profit, which is assessed before capital allowances are claimed.

"As always, where a thorough appraisal shows that the business success of a farming enterprise may be failing – or could be at risk of doing so – the first rule is always to get professional advice to assess what measures can be taken, and over what time period, to address the situation, rather than let issues deteriorate from bad to worse."