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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Farming losses: avoidance

S67, S69 Income Tax Act 2007

Taxpayers may attempt to avoid the operation of the five year rule by ensuring that the farming enterprise periodically makes an isolated profit. The most obvious year to pick for this purpose would be the sixth year, and then every sixth year thereafter.

Obviously there is nothing to say that a farm which has been unprofitable for five years could not make a profit in the sixth year. Furthermore, it may be possible for a taxpayer to arrange his or her affairs in a way that leads to the making of a genuine one-off profit.

But, especially in a case where substantial farming losses have been relieved against the income of a wealthy taxpayer, it may be worth checking to ensure that the profit has not been manufactured by means of artificial transactions or devices. These may, for example, include:

  • charging business expenses (especially interest paid) to the farmer’s capital account or not including them in the accounts at all
  • recognising sales and/or expenses in the wrong year
  • manipulating opening or closing stock valuations.

These and similar methods are unacceptable and enquiries should therefore be made, in worthwhile cases, to ensure that the accounts include all the business income and expenses for the period concerned but only the business income and expenses for the period.

Where there is a change in the persons carrying on the trade, the trade is not treated as having permanently ceased and a new trade started unless none of the persons carrying on the trade before the change carry on the trade after the change. If there is such a complete change, a new run of losses must accrue before the five year rule becomes effective to deny loss relief. Otherwise, years before the change continue to count towards the five year threshold. See BIM85635.