Nick Banks, Head of Agriculture at Scrutton Bland, takes time to reflect on the last few years and look ahead to the coming year.
As I write this article, we are in the midst of completing our clients tax returns for the tax year ending 5 April 2023. That tax year reports annual farm accounts ending between 6 April 2022 and 5t April 2023, a rollercoaster period highlighting the many challenges faced by farmers that manifest in the figures being reported.
The invasion of Ukraine by Russia on 24 February 2022 was a catalyst for a number of those challenges.
Farmers with a year end up to 30 June 2022 will be reporting results for the harvest year 2021. Profits in the main not exceptional but those who managed to hold over crops in store from that harvest and sell at post Ukraine prices achieved super profit on the back of a harvest with low input costs.
The harvest 2022 result for many was also very strong, with robust crop prices and inputs purchased before inflation took hold to drive up prices. Cost of fuel and wearing parts inflation led to higher harvest costs and that cost increase has seemingly endured.
The figures we are reporting show those that scooped bumper profit of 2021 crop sold from store combined with a robust margin on the 2022 harvest are now filing some strong profits in the 2022/23 tax year. Those on the front foot have looked ahead and secured new machinery capital allowances to mitigate the uplift in taxable profit.
Some invested in the fabric of the farm, such as land, new buildings or diversification such as holiday lets. Sound decisions at the time they were made but the challenge of increased interest rates is now to be faced if the investment was funded by debt.
Of course, in the same time frame Basic Payment Scheme subsidy has reduced but that reduction is masked by stronger margins. That reduction will be felt with less bountiful gross margin so it is important Sustainable Farming Incentive (SFI) and Countryside Stewardship options are explored.
Tax relief by averaging over a two or five-year period can help smooth those profits and the team at Scrutton Bland are navigating some complex spreadsheets to optimise the tax position for clients.
Of course, as we file these tax returns conversations with clients are now reflecting on the 2023 harvest result which was dogged by poor weather. Margins are expected to be squeezed with moderating crop prices but inflation driven growing costs. There may be good reason to reduce tax payments on account but planning is also needed for Basis Period reform, a topic we have covered in previous newsletters.
The weather has also hampered establishment of the 2024 harvest. Torrential rain in the East of England has either held up winter crops being planted or washed away much that had been drilled. Spring cropping may now be the plan but of course seed costs have increased given demand. The outlook for 2024 harvest is a concern.
The backdrop to all of this is the cost of finance. At 6 April 2022 Bank of England base rate was 0.75% and is currently 5.25% as the Monetary Policy Committee grapple with inflation. The era of ultra-low interest rates was likely to end and in my opinion, inflation was inevitable given the money pumped into the economy during the pandemic but few commentators predicted the stark escalation in interest rates that followed the disastrous Kwasi Kwarteng mini budget statement delivered on 23 September 2023.
Farmers with fixed rate debt are insulated but those with variable rates are experiencing a significant increase in debt servicing costs at a time when cashflow is starting to tighten as profits are unwound and some hefty tax bills may be falling due.
November 2023 saw UK inflation fall to 3.9%. In April 2022 the rate was 9%, peaking in October 2022 at 11.1%. The recent announcement that the rate reduction is much bigger than expected has led to some commentators predicting that base rate could be reduced to 4% by the end of 2024.
Whilst a reduction is welcome, debt servicing will still be significantly more for those on variable rate term debt or operating in overdraft. Strategic decisions may be needed, such as reviewing the term of debt or the sale of noncore assets to reduce debt and make operating cashflows more sustainable.
I do not anticipate major fiscal or legislative changes ahead of the General Election and the coming year will be dominated by political posturing of the main political parties. Consistency of policy and indeed voice of DEFRA whoever is in Government is important for both farmer and adviser to navigate what I am sure will be a year of further challenge.
At Scrutton Bland we have a team of specialist advisers who understand the sector and are very well placed to support farmers manage their business. For more information please contact firstname.lastname@example.org, your usual contact or call 0330 058 6559 to find out more.