Cost of Production and Profitability Analysis for UK Farms

Axminster · Barnstaple · Bideford · Bridgwater · Burnhan on Sea · Crediton · Exeter · Holsworthy · Honiton · Ilfracombe
· Langport · Okehampton · Plymouth · Seaton · Somerton · Tiverton · Torquay · Weston super Mare

By Your Side. On Your Sidewww.thomaswestcott.co.uk
THERE IS AN OPPORTUNITY TO
MAKE SIGNIFICANT PROFITS
THE CHALLENGE INVOLVES
CONTINUAL GOOD COST
MANAGEMENT
COSTS OF PRODUCTION

SO WHAT IS COST OF
PRODUCTION?

PROFIT OF £77,247 OR 4.12 PPL
THEREFORE COP = 20.88PPL?

CASH SURPLUS OF £13,557 OR
0.72 PPL
THEREFORE COP 24.28PPL?

NET WORTH GAIN OF £39,247
OR 2.09PPL
THEREFORE COP 22.91PPL?

CONSIDERATIONS
• WHAT ARE WE TRYING TO ACHIEVE?
• YEAR SPECIFIC OR ‘NORMALISED’?
• FAMILY LABOUR AND RENTAL VALUES
• DEPRECIATION AND REINVESTMENT
• SUCCESSION
• TAX ALLOWANCE

WHATS THE USE OF COP?

• Benchmark
• Plan
• Set targets
• Implement
• Monitor
• Improve
• Sustainability

‘the difference between failure and
success is doing a thing nearly right
and doing a thing exactly right’
‘the only difference between success
and failure is the ability to take action’

TIMING OF COP EFFORTS

PRACTICAL REMINDERS
VARIABLE COSTS
MANAGEMENT OVERHEADS
STRUCTURAL OVERHEADS
PROFIT REQUIREMENT

• 30% + OF DAIRY MARGIN
• YIELD FROM FORAGE CRITICAL
• RELIANT ON GOOD FORAGE
AND NUTRITIONAL ADVICE
• 200 COW HERD, £42,600
SAVING
• MINIMAL COST DIFFERENCE
BETWEEN GOOD & BAD SILAGE
FARM A FARM B
TOTAL YIELD 8000 8000
YIELD FROMFORAGE 3500 1500
YIELD FROMCONCENTRATE 4500 6500
FEED RATE 0.27 0.385
ANNUAL PURCHASED FEED £480 £693
PURCHASED FEED

IT DOESN’T TAKE MUCH TO MAKE A
DIFFERENCE

FERTILISER USE
Right amount, right time, right method

VALUE OF MUCK

MANAGEMENT OVERHEADS
• TOO FEW OR TOO MANY STAFF
• REPAIR COSTS VS CONTRACTING
• SELF PROPELLED FORAGER VS FORAGE
WAGON
• ELECTRICTY AND FUEL SUPPLIERS

STRUCTURAL OVERHEADS
• STOCKING RATES, LAND RENTAL &
MARGINAL ACRES
• MACHINERY POLICY
• LOAN STRUCTURE

SUMMARY
• IMPORTANT TO UNDERSTAND WHAT FIGURES
YOU ARE DEALING WITH
• SIGNIFICANT GAINS CAN BE MADE
• TARGETS NEED TO BE ACHIEVABLE
• IMPLEMENTATION IS KEY TO SUCCESS
• ONGOING PROCESS

WE ARE HERE
TO HELP……

THANK
YOU

Succession and keeping it in the family?
• Where to Start?
• How To Be Fair?
• A plan – making it work
• What have you got?

Valuing the farm, the business, and
personal assets
• Where have the assets come from?
• Is there already a family agreement?
• Has tax been considered?

BALANCE SHEET VALUATIONS
Accounts Current Day
Land & Buildings 250 acres + house + buildings £428,238 £2,250,000
Machinery £164,349 £165,000
Dairy Herd 180 cows £150,369 £216,000
Rearing Cattle 150 head £73,886 £98,500
Investments Arla £15,976 £16,000
Other assets £42,885 £42,885
TOTAL ASSETS £875,703 £2,788,385
Bank Loans and Overdraft £563,824 £563,824
Family loans £116,495 £116,495
Other Creditors £94,716 £94,716
TOTAL LIABILITIES £775,035 £775,035
CAPITAL £100,668 £2,013,350

What questions does this pose?
• Who are the partners?
• Who is taking a living from farm?
• Land – who bought it, is it all integral to farm,
does it act as security?
• Is any of land being used for non agricultural
use?

AVERAGE HERD SIZE
1996 2015
Dairy Cows 75 142
Acres 94 acres 178 acres
• How has this been managed?
• Land purchase or rent - in whose name?

Farm Provides Living For:
Parents – retired - £8,000 per year
Farmer and Wife - £20,000 per year
Son or daughter - ?????? Per year

Partners and partnerships
• Often created for income tax reasons
• How often are they reviewed?
• Who buys assets – individuals or partnership?
• Whose name is money borrowed in?
• What does the partnership need to carry on
after death of one partner?

What Is Fair?
3 offspring
1) Oldest works away in very good job, no mortgage
2) Middle works in social services, married with children, struggles
financially
3) Works at home (15 years), paid minimum, but all costs paid and
lives in cottage built by Grandparents, no long term partner
HOW DO YOU LOOK AFTER ALL?

Questions to be answered after true capital is valued
a) What assets need to remain with farming business?
b) What labilities can be afforded?
c) Should restrictions have time limits?
d) Can any part be split off into a different business
e) Are there restrictions on what can be done – Ag.
Ties.
f) Tax implications

ACTION PLAN
1)Discuss plans informally
2)Write a business plan with options
3)Agree principles
4)Seek taxation advice
5)Write wills and other legal agreements
6)Review regularly

Be fair to all - keep tax at a minimum - ensure retiring
partners have an appropriate lifestyle - keep farm going -
what assets can be realised - let everyone know - reward
those who have made the business - give security for
those working in business - make sure succession to
tenancy can take place - pass on asset as appropriate -
keep whole family informed

Thank You
“The content of this presentation has been prepared as a guide to topics of current financial business interest. We strongly recommend you take
professional advice before making decisions on matters discussed within. We can accept no responsibility for any loss to any person acting, or
refraining from acting, as a result of this material.”

Axminster · Barnstaple · Bideford · Bridgwater · Burnham on Sea · Crediton · Exeter · Holsworthy · Honiton · Ilfracombe
· Langport · Okehampton · Plymouth · Seaton · Somerton · Tiverton · Torquay · Weston super Mare

CASH FLOW
• Reduce tax payments on account
• Seek loan repayment holiday
• Defer capital expenditure
• Reschedule HP payments
• Suspend pension payments
• Realise assets
• Draw down pension

AUTO-ENROLMENT
• Check staging date
• All eligible workers enrolled
• Employer contributions due
• Compliance requirements

NATIONAL LIVING WAGE
• From 1 April 2016 for 25 and over
• Increase from £6.50 to £7.20
• Rising to £9 in 2020
• Employment allowance available

IHT RESIDENTIAL NIL RATE BAND
• Nil rate band frozen at £325k to 2020/21
• Additional £175k relief for family home
• Phased in over 4 years from April 2017
• Lose £1 of relief for each £2 over £2 million
• House left to direct descendants

IHT RESIDENTIAL NIL RATE BAND
• Land worth £2 million + house worth £500k left to
spouse
• Reduced RNRB
• £1 million of land left to children
• Spouse receives RNRB

CAPITAL GAINS TAX
• Reduced to 10% and 20%
• Residential properties remain at 18% and 28%

ANNUAL INVESTMENT ALLOWANCE
• Permanent allowance of £200k from 1 January 2016

AVERAGING
• From 2016/17 have a choice of averaging over 2 years or
over 5 years
• 5 year averaging available if:
• Comparison of latest year and average of previous 4
years shows one figure is 75% or less of the other
• Any year shows a nil profit

2012/13
£
2014/15
£
2015/16
£
2016/17
£
2017/18
£
Profits 60,000 60,000 60,000 10,000 10,000
2 year
averaging
60,000 60,000 35,000 22,500 22,500
5 year
averaging
40,000 40,000 40,000 40,000 40,000
Tax saving £4,600
AVERAGING

INVESTMENT PROPERTY
- Stamp duty land tax
• Additional 3% SDLT on purchase of second home
• 36 month overlap period but tax paid and refunded
Price SDLT 2nd home SDLT
Up to £125k nil 3%
£125k-£250k 2% 5%
£250k-£925k 5% 8%
£925k-£1.5m 10% 13%
> £1.5m 12% 15%

INVESTMENT PROPERTY
- Tax relief on interest
• Interest tax relief reducing to 20%
• Phased in from 2017 to 2020

Current New
£ £
Rent 10,000 10,000
Interest 9,000 nil
Profit 1,000 10,000
Tax 400 4,000
Interest credit 1,800
Tax liability 400 2,200
INTEREST TAX RELIEF

ACCOUNTS
• New accounting standards have been introduced
• Impacts on accounting treatment of:
• Stock
• Animals on herd basis
• Government grants

MAKING TAX DIGITAL
• Biggest change since double entry!
• Unincorporated businesses and landlords from 2018
• Companies from 2020
• Records kept on approved software
• Quarterly online reporting
• Year end adjustments – No Tax Return

RATES OF TAX
• 7.5%
• 10%
• 18%
• 20%
• 28%
• 32.5%
• 40%
• 45%

Cost of Production and Profitability Analysis for UK Farms

Recommended

Recommended

More Related Content

Similar to Cost of Production and Profitability Analysis for UK Farms

Similar to Cost of Production and Profitability Analysis for UK Farms (20)

Recently uploaded

Recently uploaded (20)

Cost of Production and Profitability Analysis for UK Farms