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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Farming: herd basis: share farming and the herd basis

S112(7)(b) Income Tax (Trading and Other Income) Act 2005, S110(7)(b) Corporation Tax Act 2009-

Share farming is an arrangement whereby typically a landowner and a working farmer make separate contributions to a farming enterprise, each taking a share in the produce (see BIM55070). Livestock subject to a share farming agreement is normally held in undivided shares (that is, both parties to the agreement own a share of each animal rather than each owning specific whole animals). The legislation (see BIM55635) enables share farmers to apply the herd basis to these shares.

The herd basis may be used by one or both of the parties to a share farming agreement but entering into the agreement is not, of itself, an occasion on which a herd basis election can be made. Thus, for example, the herd basis can be applied by both parties in the following situations:

  • where neither party has an existing herd basis election and each qualifies to make an election (for example, because the share farming is the first time either has kept a herd of the class in question);
  • where both parties already have an election in respect of a herd of the same class (the elections will extend to the jointly owned herd);
  • where only one party has an existing election and the other does not but nevertheless qualifies to make one.

Where both parties are on the herd basis, each is treated as having a separate herd for the purpose of applying the herd basis rules.

Sometimes one party may have previously kept a herd of the class in question but not been on the herd basis, or may qualify to make an election but not wish to do so. The herd basis may be used by the other party in such situations. For example:

  • where one party has an existing valid election and the other party does not and does not qualify to make one, then the herd basis rules can be applied to the undivided shares held by the party with the existing valid election;
  • where neither party has an existing valid election and only one party is qualified to make an election, or both are qualified and only one wishes to do so, then the herd basis will be applied to the undivided shares held by the party making the valid herd basis election.

In applying the herd basis to share farming situations it is helpful to use the concept of `animal units’. For example, a 60% undivided interest in a herd of 100 animals represents 60 animal units. The use of the concept, which has been discussed with the National Farmers’ Union and the Country Landowners Association (now the Country Land and Business Association), is described in the following examples.

EXAMPLE 1 - COMMENCEMENT OF SHARE FARMING - SUBSTANTIAL DISPOSAL BY ONE PARTY.

Alan, who is on the herd basis, enters into a share farming agreement with Bob, who has not owned livestock before but makes a herd basis election. Before entering into the agreement Alan owned 100 whole animals, in other words 100 animal units. Under the agreement the animals are owned 40% by Alan and 60% by Bob. Bob pays a lump sum to Alan.

  • Alan has disposed of 60 animal units (60% x 100) to Bob. This amounts to a substantial disposal (60 out of 100 is more than 20%) and the profit or loss on disposal is exempt (see BIM55540).
  • The lump sum paid by Bob is the initial cost to him of setting up his herd and so is not an allowable trading deduction.

EXAMPLE 2 - COMMENCEMENT OF SHARE FARMING - MERGER OF HERDS

Carolyn and Derek (both on the herd basis) have 100 and 50 animals respectively. They decide to share farm and the ratio is 2/3 to Carolyn and 1/3 to Derek.

  • Carolyn has disposed of 33.33 animal units (one third of each of 100 animals) to Derek and acquired 33.33 animal units (two thirds of 50 animals) from Derek. The acquisitions are regarded as replacing (see BIM55535) the disposals.
  • Similarly Derek has disposed of 33.33 animal units and replaced them by 33.33 animal units.

EXAMPLE 3 - ADJUSTMENT BETWEEN THE PARTIES

Ethel and Frank (both on the herd basis) share 100 animals in the ratio 60:40. Originally the whole herd was owned by Ethel, who sold a 40% interest to Frank when they started share farming. This amounted to a substantial disposal so her profit on the disposal of 40 animal units was exempt (see Example 1 above).

They decide to change the sharing ratio to 70:30 and a payment is made from Ethel to Frank. The change in ratio is within five years of the start of the share farming arrangement.

  • Ethel is now treated as having replaced 10 of the animal units in the earlier disposal (see BIM55545). A quarter of the sum she originally received from Frank must now be brought in as a trading receipt and the payment made in respect of the change in ratio is an allowable deduction.
  • Frank has disposed of 10 out of 40 animal units so any profit or loss he realises on the change in ratio is exempt (see BIM55540).

The parties later buy a further 10 animals which are also shared 70:30. The acquisition is within five years of the adjustment of the sharing ratio but not within five years of the original transfer from Ethel to Frank on entering into the share farming agreement.

  • The 7 animal units purchased by Ethel are treated as additions to her herd (see BIM55530) so her share of the purchase price is not an allowable deduction.
  • Frank is treated as having replaced three out of his previous substantial disposal of 10 (see BIM55545). Three tenths of the sum he received from Ethel on the change in ratio is now brought in as a trading receipt and his share of the purchase price of the new animals is an allowable deduction.

EXAMPLE 4 - CESSATION OF SHARE FARMING

George and Howard (both on the herd basis) share 100 animals with a ratio 70:30. They sell up and George retires. Howard gets a tenancy within five years and buys 40 animals.

  • George’s profit or loss on the disposal of 70 animal units is exempt (see BIM55540).
  • Howard’s profit or loss on the disposal of 30 animal units will similarly have been exempt. However 30 of the 40 animals subsequently acquired are regarded as replacing the 30 animal units disposed (see BIM55545). The whole of his share of the proceeds of the earlier disposal is therefore brought in as a trading receipt and the cost of 30 of the new animals is an allowable deduction. The other 10 new animals are treated as additions and their cost is disallowed.

EXAMPLE 5 - ANIMALS OWNED OUTSIDE THE SHARE FARMING AGREEMENT

Ian and Jenny (both on the herd basis) share 100 animals 70:30. Jenny also owns 30 entirely on her own account which form part of the same herd. Ian therefore has 70 animal units and Jenny 60. They dispose of 25 of the shared animals.

  • Ian has disposed of 17.5 (70% x 25) of his 70 animal units which, being greater than 20%, amounts to a substantial disposal so his profit or loss on disposal is exempt (see BIM55540).
  • Jenny has disposed of 7.5 (30% x 25) of her 60 animal units which does not amount to a substantial disposal. Her profit or loss on the disposal is therefore included in the computation of her farming profits (see BIM55550).