FARMERS have been encouraged to subject their businesses to 'warts and all' accounting, rather than attempting to downplay risks that could leave them operating at a loss.

Rural accountants Saffery Champness advised that burying your head in the sand is not an option when farm income starts to fall short, and factors like the recent delays in support payments from the Scottish Government should be incorporated into everyone's long-term thinking.

Firm partner Coll Murchison-MacDonald warned that where this level of shortfall or late payment had not been budgeted into a farm business’ forecasting, financial hardship could be compounded by other factors like a poor harvest, poor commodity prices, losses over successive years, tenants struggling with cash flow and therefore late rent payments, rising prices for fertilisers and other inputs.

"Acknowledging the gravity of the situation early is vital, planning remains crucial, and while some setbacks may be unexpected, others can be foreseen and managed," said Mr Murchison-MacDonald. "So talk to your accountant and your bank manager to identify potential extra working capital requirements and discuss the 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 factors in late receipt of Basic Payment Scheme entitlement. Be sure that finance costs are fully tax deductible. They should be if they are required to meet trading expenses."

The rules for hobby farming also require careful consideration, he advised. These prevent sideways loss relief –setting farming losses against other income – from 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 next two years or future losses will not be able to be set against other income until a farming profit has been generated.

"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," he added. "However, HMRC has a reputation for being extremely tough in the interpretation of this position and rarely allows extension beyond the fifth year of losses. Farmers should review their farm strategy, cost control and timing of income receipts etc so as to make a genuine profit, before capital allowances, in order to avoid being caught by the hobby farming legislation.

"Where a warts and all appraisal shows that the viability of a farming enterprise may be failing – or could be at risk of doing so – the first rule should always be to get professional advice to assess what measures can be taken, and over what time period, to address the situation, rather than let matters deteriorate from bad to worse."