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This helpsheet gives you information about special rules which can apply to farmers and market gardeners that prepare their accounts on accruals basis:
- farmers’ averaging relief
- herd basis
- the treatment of compensation for compulsory slaughter
- some aspects of information from accounts in addition to those covered in helpsheet 229: information from your accounts
- agricultural buildings allowance
These rules don’t apply to farmers and market gardeners who work out their profits using the cash basis. For more information on the cash basis please see helpsheet 222: how to calculate your taxable profits.
Farmers’ averaging relief
Provided certain conditions are met, a special relief is available to farmers and market gardeners under which they can claim to add together their profits from farming or market gardening for 2 years or 5 years and be taxable on the average of those profits. This helps to even out fluctuating results. Farmers can choose whether to average profits over either 2 years or 5 years.
‘Farming’ includes the intensive rearing of livestock or fish on a commercial basis for the production of food for human consumption.
Averaging doesn’t affect the amount of tax and National Insurance contributions (NICs) you pay in earlier years. The adjustments for all years that relate to an averaging claim are taken into account in your 2016 to 2017 tax and NICs. You should pay tax and NICs for earlier years in full, even if averaging reduces your profit for those years, otherwise you may have to pay interest on unpaid tax and NICs.
How to claim: sole traders
Claim in box 72 in the self-employment (full) pages.
How to claim: partners
Claim in box 11 in your partnership pages. If you wish to claim averaging, you’re entitled to do so even if your partners decide not to claim.
2 year averaging
Claims can be made by:
- sole traders
- partners, except people who joined or left the partnership in 2015 to 2016 or 2016 to 2017
You can’t claim if your business started or ended in 2015 to 2016 or 2016 to 2017.
The difference between the profits for the 2 years must be more than 25% of the profits of the year with the better result. You can’t make a claim where the difference between the profits is 25% or less.
5 year averaging
Claims can be made by:
- sole traders
- partners, except people who joined or left the partnership in 2012 to 2013 or later
You can’t claim if your business started or ended in 2012 to 2013 or later.
The difference between your profits for 2016 to 2017 and the average of the profits for the 4 previous tax years must be more than 25% of the profits of the higher figure. This condition is also satisfied if any one of these years has nil profits or a loss. You can’t make a claim where the difference between the profits is 25% or less.
These notes can’t give detailed guidance on every situation. If you read these notes but can’t then work out your profits for 2015 to 2016 or 2016 to 2017, ask HM Revenue and Customs (HMRC) or your tax adviser for more help.
Profit: sole traders
Profit means profits after capital allowances and balancing charges, see helpsheet 222: how to calculate your taxable profits and helpsheet 252: capital allowances and balancing charges for more information.
Your profit is the figure in box 64 or 65 on the self-employment (full) pages, adjusted by any amounts in boxes 68 and 69. Losses count as zero.
If a profit has been averaged already, then the figure to use is the averaged profit. For example, if 2015 to 2016 had already been averaged with 2014 to 2015, the averaged profit will be shown in box 73 of the 2015 to 2016 self-employment (full) pages.
Your profit for 2015 to 2016 and 2016 to 2017 is the figure in box 8 of your partnership pages, adjusted by the figures (if any) in boxes 9 and 13.
Examples of averaging
Example 1 – 2 year averaging
John’s results are:
|2016 to 2017 profit||£10,000|
|2015 to 2016 profit||£40,000|
If averaging is claimed, the profit for each year becomes:
|(£10,000 + £40,000) ÷ 2 =||£25,000|
This applies even if the £40,000 for 2015 to 2016 was the result of an averaging claim for 2015 to 2016 and 2014 to 2015. John’s 2016 to 2017 profit is increased by £15,000 and this increase must be entered in box 72 of the self-employment (full) pages or box 11 of the partnership pages.
Example 2 – 2 year averaging
Ian’s results are:
|2016 to 2017 loss||£20,000|
|2015 to 2016 profit||£32,000|
The loss counts as zero when averaging is calculated so the average result for each year is:
|(0 + £32,000) ÷ 2 =||£16,000|
Ian’s 2016 to 2017 profit is increased from £0 to £16,000 and this increase of £16,000 must be entered in box 72 on page SEF 4 of the self-employment (full) pages (or box 11 of the partnership pages if Ian is a partner). The loss of £20,000 should be entered in box 77 (box 21 for partners). Unless there are any adjustments in boxes 68 and 69 (boxes 9 and 14 for partners), this figure will be the same as the figure in box 67 (box 8 for partners).
Example 3 – 5 year averaging
Phoebe’s results are:
|2016 to 2017 profit||£60,000|
|2015 to 2016 profit||£50,000|
|2014 to 2015 profit||£20,000|
|2013 to 2014 profit||£50,000|
|2012 to 2013 profit||£20,000|
If averaging is claimed, the profit for each year becomes:
|(£60,000 + £50,000 + £20,000 + £50,000 + £20,000) ÷ 5 =||£40,000|
The average profits for years 2012 to 2013 through to 2015 to 2016 are:
|£35,000 (£50,000 + £20,000 + £50,000 + £20,000 ÷ 4) =||£35,000|
The difference between Phoebe’s profits for 2016 to 2017 of £60,000 and the average of the previous 4 years of £35,000 is £25,000, which is greater than £15,000 (25% of the higher figure). The reduction of £20,000 to Phoebe’s 2016 to 2017 profit must be entered, with a minus sign, in box 72 of the self-employment (full) pages or box 11 of the partnership pages.
The change in the profits for 2015 to 2016 and earlier years
2 year claim
A claim to averaging for 2016 to 2017 and 2015 to 2016 deems there to be a change to your income for 2015 to 2016. If, as a result, you wish to change other claims to relief for 2015 to 2016, you can do so when making the averaging claim, but averaging doesn’t change your actual income or your tax bill for 2015 to 2016. Depending on whether your 2015 to 2016 profit goes down or up as a result of averaging, relief is given or the extra tax is charged by way of an adjustment to your tax liability for 2016 to 2017.
5 year claim
The same position applies for 2012 to 2013, 2013 to 2014 and 2014 to 2015 if you’ve chosen to make a claim to average profits over 5 years. In this situation, depending on whether your overall profits for these years go up or down as a result of averaging, relief is again given or extra tax is charged by way of an adjustment to your tax liability for 2016 to 2017.
To calculate the 2016 to 2017 adjustment you must:
- work out the increase or decrease in your tax and Class 4 NICs for 2015 to 2016 which would have happened if you had amended your 2016 tax return because of the changed profit including any consequential changes (for example, because changing the profit changes the limits for Retirement Annuity Relief)
- if you’ve made a claim to average profits over 5 years, then you’ll need to repeat this step for years 2012 to 2013, 2013 to 2014 and 2014 to 2015, working out the increase or decrease in your tax and Class 4 NICs which would have happened if you had amended that years return – add the increases and deduct the decreases for 2012 to 2013, 2013 to 2014, 2014 to 2015 and 2015 to 2016 to arrive at a single adjustment
- enter the adjustment in box 14 (increases) or box 15 (decreases) on your tax calculation summary pages for 2016 to 2017
If your profits change
Any averaging claim you’ve made in your tax return will lapse if your profits for either 2016 to 2017 or any earlier year that forms part of a 2016 to 2017 averaging claim changes. Provided the time limit for amending your tax return has not expired, you can make a claim to average the changed profits by amending your tax return, whether or not you originally made a claim.
Even if the time limit for amending your tax return has expired, you can still make a claim if you used averaging to calculate your taxable profit before the profits changed. You can’t amend the tax return yourself but you should write to HMRC to ask for any necessary adjustments to be made. Don’t delay writing because there’s a time limit.
Partners can ignore this section when completing the Partnership pages.
Helpsheet 232: farm and stock valuation explains the methods of farm and stock valuation which are acceptable to HMRC.
You may provide a breakdown of that figure in the ‘Any other information’ box 103. Providing this information with your tax return may help avoid enquiries.
The herd basis
Partners can ignore this section when completing the partnership pages.
What the herd basis is
The herd basis is a special method of working out profits or losses which may be used by people who keep production livestock. If you use the herd basis you’ll need to keep records so that you can identify the figures to be used when applying the special rules.
As a normal rule, farm animals are dealt with as trading stock. However, some farm animals – those which are kept by farmers not primarily for resale but for the sake of the products (for example, milk or eggs) or offspring (for example, lambs or piglets) which they produce – are in many ways more like capital assets of the farmer’s business. Tax law recognises this by giving farmers the option of dealing with such ‘production animals’ under the herd basis. It provides a set of rules whereby a herd or flock of production animals is excluded from trading stock and treated, in most but not all circumstances, like a capital asset.
A farmer must elect for the herd basis, otherwise the animals are treated as trading stock. The election must specify the class of animals concerned and, once it has been made, the herd basis must be used for as long as the farmer continues to keep animals of that class. The election has to be made soon after the farmer first starts keeping animals of that class, and then the herd basis applies to those animals from the outset. There is a further opportunity to elect to use the herd basis if a herd or a substantial part of it (20% or more) is compulsorily slaughtered.
The effect of electing for the herd basis
Where a herd basis election is in force, the treatment for the purpose of calculating farming profits of the herd or herds covered by the election is governed by the special rules. Very briefly they are:
- the initial cost of the herd isn’t an allowable deduction, nor is the cost of any subsequent increase in herd size
- the net cost of replacing animals in the herd (but not any element of improvement) is an allowable deduction
- where the odd animal, or just a few animals (amounting to less than 20% of the herd), are sold from the herd and not replaced, the resulting profit or loss is taken into account in arriving at the farming profits
- where the whole herd, or a substantial part (20% or more) of the herd, is sold and not replaced, the resulting profit or loss isn’t taken into account
The herd basis can also apply where animals are jointly owned, for example, in some share-farming arrangements. There are more special rules for particular situations.
Adjustments to be made in the self-employment pages of your personal tax return or the Partnership Tax Return
If you have made a herd basis election then you should include the herd in box 84 of your self-employment (full) pages.
It may be helpful if you provide in the ‘Any other information’ box 103 a breakdown of the figures showing the number and cost of the animals. Similarly, you can use box 103 to explain any herd basis adjustments in your accounts or how you worked out the adjustments in boxes 60 to 62. Providing this information with your tax return may help to avoid enquiries.
To get to the taxable profit, special adjustments may be needed to the profits shown by the accounts. This will depend upon the way the herd is accounted for. You should deal with these adjustments by making entries in boxes 32 to 46 to remove profits or losses which have been included but which aren’t taxable, and/or expenses which have been included but which aren’t allowable. If you have included a sum, which isn’t taxable in your business turnover, in box 15, then you should make the adjustment in box 62.
- an animal dies and is replaced by a better animal costing £200 more than a replacement of the same quality as the one that died (because of the way the accounts are prepared, the cost of the replacement is included in box 17 – the £200 which isn’t allowable should be included in box 32)
- a substantial part of a herd is sold and the profit of £10,000 is included in box 29 – it isn’t taxable so it should be adjusted by a negative entry in box 44 – if the profit had been included in business turnover at box 15 then the adjustment would be made in box 62
- the following year the herd in the previous example is replaced – the cost of the replacements is included in box 17 – the proceeds of sale of the herd sold the previous year now become taxable and must be added to the profit (make the adjustment in box 60 and put a note in the ‘Any other information’ box 103 to explain the adjustment)
- a home-bred dairy cow is added to a herd – the cost of breeding it is included in the various expenses in the accounts – the farmer’s records are inadequate to calculate the cost accurately (the cost is estimated at 60% of market value, see helpsheet 232: farm and stock valuation – if the sum to be disallowed has been included in sales, then no further adjustment is required – otherwise the sum to be disallowed should be included in box 32 – if an adjustment is needed but you aren’t sure where to put it, please include it where you think best and use the ‘Any other information’ box 103 to say what you have done)
If you would like more information about the herd basis ask HMRC or your tax adviser.
Most losses can be claimed against other income, but there are special rules which restrict your ability to claim if your farm is uncommercial or if you had a run of losses (worked out before capital allowances) of more than 5 tax years. For more information, ask HMRC or your tax adviser.
Helpsheet 227: losses provides more information on losses.
From 2013 to 2014 there’s a limit on the amount of income tax relief that an individual may claim for deduction from their total income in a tax year. The limit in each tax year is the greater of £50,000 or 25% of the individual’s adjusted total income. If you are, or think you could be, impacted by the limit, please see helpsheet 204: limit on Income Tax relief.
Compensation for compulsory slaughter is normally treated as sale proceeds whether or not the animal concerned is part of a production herd accounted for on the herd basis. Where the animals slaughtered aren’t on the herd basis and could not be (even with the fresh opportunity to elect for herd basis following compulsory slaughter of more than 20% of a herd), there are special rules which allow you to remove the profit arising from the year of slaughter and bring it in equal instalments over the next 3 years. Use box 62 to show profits removed and box 60 to show profits brought back in and put an explanation in the ‘Any other information’ box 103. For more information, ask HMRC or your tax adviser.
Standard accounts information
Helpsheet 229: information from your accounts gives more advice on transferring figures from accounts to the tax return and includes 2 examples of a general nature.
The accounts produced for farming businesses have traditionally included more detail than those for other businesses of a comparable size. Examples 4 and 5 show how the figures from one such set of accounts could be used to complete the standard accounts information sections of the self-employment (full) pages or Partnership Tax Return.
The accounts are intended to be broadly realistic, but figures are illustrative only. They don’t necessarily reflect our views on what may or may not be acceptable in any particular case.
For most businesses the information on the self-employment (full) pages or Partnership Tax Return, together with any entries in the ‘Any other information’ box considered necessary, will allow a full and fair picture of your business to be presented.
In some larger or more complex businesses, this may not, on its own, provide an adequate means of disclosure. You should consider submitting more information including, where necessary, accounts and supporting calculations where:
- a large farming business has a substantial turnover
- the farming business is complex (perhaps because it is highly specialised or diversified)
- accounts and/or a note of the calculations are required for a proper understanding of the figures
You must also complete the standard accounts information sections of the tax return.
Online forms, phone numbers and addresses for advice on Self Assessment.