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HMRC internal manual

Business Income Manual

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Farming losses: test of commerciality

S66 Income Tax Act 2007

Trade loss relief against general income (see BIM85605) is denied unless the taxpayer can show that, during the period when the loss was sustained, the trade was being carried on on a commercial basis and with a view to the realisation of profit. For guidance on the meaning of ‘not on a commercial basis’, see BIM85705; and with a view to the realisation of profits, see BIM85710.

The provision was first introduced in 1960. The Chancellor of the day stated in the course of a Parliamentary debate on the clause:

‘we are after the extreme cases in which expenditure very greatly exceeds income or any possible income which can ever be made and in which, however long the period, no degree of profitability can ever be reached’.

These words should be borne in mind when considering the application of the restriction to farming cases. The small farmer and the farmer farming marginal land genuinely trying to make a living from their farms in difficult circumstances are not caught.

Nor does the restriction operate to deny relief to a farmer who incurs temporary losses while establishing an enterprise, for instance by building up a production herd or bringing land back into fertility, provided the enterprise in which he or she is engaged is likely in due course to become an economic undertaking. For example, it may take a farmer five years to clear and work land infested with bracken before there can be an expectation of profit. Trade loss relief against general income should not be refused on the initial losses in such a case.

General guidance on the restriction may be found at BIM85700 onwards.