MANY farmers unknowingly face a potential double whammy if they fail to understand the tax implications of the mid-term review.

The warning comes from Mike Butler, national director of Tenon Rural Services, who said the MTR was an opportunity to reconsider tax strategies for income and inheritance taxes.

There were several financial issues emerging linked to the way the new single farm payment would be treated for accounting and taxation purposes, he said.

"Farm businesses need to address these urgently to avoid punitive, and unnecessary tax payments," said Mr Butler. "Cereal growers, in particular, could find themselves paying tax twice on the same payment."

It could be a major concern for arable farmers, who had historically deferred arable area payments, to legitimately put back the date for tax payments.

In 2005, the transition year, farms carrying forward deferred IACS payments from this year's claims could find these aggregated with their first year's SFP. This has the potential to incur two tax charges.

"Deferring cereal subsidies relies on the principle that the subsidy supported the sale of the crop and, if a crop was not sold at the end of the year, the subsidy did not need to be recognised in that year," he said. "The new payments are fundamentally different and their payment is in no way related to production or crop sales."

Another issue expected to affect dairy farmers is the accounting treatment of the SFP, in particular the periods in which the income is recognised.

For milk producers, income has already been accrued from the Dairy Premium scheme, the first year of which was based on quota holdings on March 31.

"Many dairy farmers still are not aware of the premiums they will receive, let alone the fact that this income needs to be included in the tax equation," said Mr Butler.

Once these potential difficulties have been recognised, legitimate steps can be taken to mitigate the financial costs. If tax has to be paid, he recommends careful planning.

"As with all tax strategies, planning is vital, making sure that any necessary changes are put in place in time to cover potential tax bills," he said. "Assessing the size of the tax charge is the first step. It's an easy step if you know you are already paying what you think is too much tax.