Approximately six weeks ago, the UK voted to leave the EU. Whichever way the 23 June vote had gone, the decision would have been considered momentous.
So, we are where we are – but what are the consequences for the agricultural (and rural) community?
With much of a farm’s income coming from the subsidies financed by the Common Agricultural Policy (CAP), many farmers may worry that, without other economic factors having a beneficial impact, their future income may be jeopardised by the UK government slicing the cake differently post-Brexit. This could result in the allocation of more income to the NHS, but less to DEFRA (or whatever the department will be called in future), for example. However, the Chancellor’s recent comments on the matter may allay some of those fears.
So, what can be done in the short term to mitigate the possible (and, I stress, possible) loss of income in two or more years’ time?
Well, some would say ‘Generate more turnover!’, but we all know that it is never as simple as turning the turnover switch on and off: just ask a dairy farmer, who will tell you that increasing the volume of milk produced will not automatically increase the value of turnover. Simple economics tell us that prices are determined by supply and demand. Over-production can suppress prices, whatever the industry!
The other options are to reduce costs, or to increase investment (i.e. invest in assets that will yield an income). Therefore, it will be interesting to see how the banks react in the short term to the recent cut in the Bank of England Base Rate. Now may be the time to opt to fix the rate of interest on your existing borrowing, comparing the immediate cost of exiting an existing arrangement with the long term benefit of a lower fixed rate. Don’t discount renegotiation as an option – if nothing else, it will keep your relationship manager on his or her toes!
Of course, borrowing costs are not the only costs that can be controlled and, hopefully, reduced, without having any adverse impact on income.
Therefore, now is the time to speak to your accountant and also to seek specialist advice, if necessary.
The wisdom of investing in assets that will contribute to generating income is worthy of discussion with your accountant. With interest rates at an historically low level, the purchase of that tractor (or other item of machinery) you have been looking at for the last year or so may now be appropriate.
However, with the pound’s volatility on the foreign exchange markets, imports may now be more expensive, but supply and demand will also be a determining factor in affordability.
Over-production (less likely due to stock being manufactured to order) or overstocking by agricultural machinery suppliers (more likely due to the ‘fantastic’ part-exchange deals offered in the recent past), could outweigh the negative impact of foreign exchange fluctuations.
Therefore, the recommendations are:
- Speak to your accountant and take advice given
- Take the advice of specialists in your particular farming enterprise (or enterprises)
- Shop around for the best price, whether that be for interest rates or products
Always remember: be positive. It has never been so ‘cheap’ to borrow money. However, you should always follow steps 1 to 3 above, rather than diving headfirst into an arrangement that has not been properly costed, and whose impact on cash flow (affordability) and profit has not been accounted for.
And finally – it has never been a good idea to let the tax tail wag the dog. However good the ‘deal’ is, will you see the full tax benefit in the timeframe you envisage?
Avoid reading headlines regarding the Capital Allowance regime and speak to your accountant before committing yourself.