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HMRC internal manual

Business Income Manual

Farming: overview of the herd basis

S111-S129 Income Tax (Trading and Other Income) Act 2005, S109-S127 Corporation Tax Act 2009

As a normal rule, farm animals are dealt with as trading stock (see BIM55425). However, some farm animals 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. These are in many ways more like the farmer’s capital assets. Tax law recognises this by giving farmers the option of dealing with such `production animals’ under the herd basis.

The herd basis 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. These rules are summarised in BIM55505. From the farmer’s point of view, the main benefits are likely to be that:

  • the cost of maintaining the herd can be charged against tax, and
  • any profit on its eventual disposal will be tax-free.

A farmer must elect for the herd basis; otherwise the animals are treated as trading stock. The election, which is irrevocable, must specify the class of animals concerned. Normally it 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 (see BIM55600 - BIM55605).

The legislation, although expressed in terms of farmers, applies to any person who keeps a production herd for the purposes of a trade even though that trade may not be farming, see BIM55565.

Any person with a herd basis election is excluded from calculating the profits of their trade using the cash basis (see BIM70000 onwards)