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HMRC internal manual

Business Income Manual

Farming: compensation received for compulsory slaughter of animals

S126 and S225ZA-S225ZG Income Tax (Trading and Other Income) Act 2005, S124 and S127A-S127G Corporation Tax Act 2009

Under the Animal Health Act 1981 DEFRA operates a slaughter policy with compensation for dealing with certain serious animal diseases. (In addition to DEFRA compensation, farmers may also receive compensation under an insurance policy - see BIM55195.) DEFRA compensation paid is normally treated for tax purposes as follows:

  • Where the animals form part of the farmer’s trading stock, as a trading receipt of the accounting period in which the slaughter takes place.
  • Where the animals are members of a herd forming the subject of a herd basis election (see BIM55500 onwards), as `proceeds of sale’.

Where the first alternative applies, the accounts for the year of slaughter are likely to show an abnormal profit on livestock account and consequently to give rise to an abnormally heavy tax liability for the corresponding tax year. To meet this problem, the legislation provides a spreading relief. The way it operates is explained with examples at BIM55185 - BIM55190.

Where animals are members of a herd for which a herd basis election is made and the animals slaughtered constitute the whole, or a substantial part, of a `production herd’, the compensation receipts for the slaughtered animals are brought into account as receipts only when the corresponding replacement animals join the new herd. Farmers receiving compensation who have not previously elected for the herd basis and whose herds have been compulsorily slaughtered on account of disease are permitted to make a retrospective herd basis election to include the year of slaughter (see BIM55605).

The rules on spreading relief and herd basis do not apply when calculating profits on the cash basis (see BIM70000 onwards).