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Farmers Averaging – Getting Down & Dirty with my Hoes
The weather in Britain affects all of us but possibly none more so than farmers.
Not only do farmers have the extreme and unpredictable weather to contend with, they also have general price elasticity, the global market and even Brexit to consider whilst trying to run their business. All of these factors can cause the profits of their farming business to be violate and fluctuate considerably from one year to the next. Under normal tax rules for sole traders and partnerships, this could result in a large tax bill one year (with corresponding, large payments on account due for the following year) but lower profits and poor cash flow in the next year.
To combat this, sole trade and partnership farmers have an option to average their taxable trading profits over a period of either 2 consecutive years or 5 consecutive years. This is known as ‘farmers averaging’ where they are then taxed in each year on the averaged profit.
This helps farmers to level out their profits and therefore also their tax payable.
To qualify for farmers averaging the business must have been trading for a full 2 or 5 year period.
The farmers must also meet additional criteria regarding their profits. For the 2 year period, the difference between the profits for the 2 years must be more than 25% of the profits of the year with the higher profits. For the 5 year period, the difference between the average profits for the previous 4 years and the 5th year’s profits must be more than 25% of the higher amount.
If there is a loss in any of the years being considered, the figure will be treated as nil for the purposes of farmers averaging the loss made will then be available for normal loss relief.
This relief must be claimed and made within 12 months of the normal self assessment filing deadline for the period that the claim relates to.
Under normal rules, farmers treat their animals as trading stock. However, sometimes animals are kept for products such as milk or eggs or kept for producing offspring such as lambs or piglets, rather than being held for resale. In these cases, the animals are more like capital assets of the farmer’s business. As such, tax law allows these productions animals to be valued under the ‘herd basis’ which excludes them from the trading stock and normally treated like a capital asset.
For the herd basis to apply, the farmer must make an election otherwise they will be treated like the other animals and classed as trading stock. The election is made on a class of animals and must be made as soon as the farmer starts to keep the animals and the election will continue to be used for as long as the farmer keeps animals of that class.
However, it is possible to elect to use the herd basis if 20% or more is compulsory slaughtered.
Don’t make a misteak
If compensation is received for a compulsory slaughter of an animal the amount received is normally treated as sale proceeds. If the slaughtered animals aren’t valued on the herd basis, there is a special rule whereby the profit arising from the year of the slaughter is removed and brought back in over the next 3 years in annual instalments.
For more information on farming tax and agricultural taxes please contact a member of our helpful tax advice team, you can also read more about these topics below such as agricultural property relief.