Farmers averaging

Published on 12th October 2018

For most farmers the wet and cold winter resulted in lengthy housing of livestock and a setback to crops. Then a heat wave hit the whole of the UK, impacting on the yield of grass and cereal crops which is likely to reduce farm profitability for the 2017/2018 and 2018/2019 accounting years.

An extension to the 2-year averaging period was introduced from 6 April 2016 to a 5-year averaging period.

The ability for farmers to average profits over consecutive years is an important provision which enables tax liabilities to be evened out by ensuring that personal allowances are utilised each year and where possible, the amounts falling into higher rate tax are minimised.

Making a 5-year averaging claim in 2017/2018 means that averaging will apply for the period from 2013/2014 to 2017/2018. A full review of each year needs to be carried out to ensure a 5-year claim is beneficial.

It may be advantageous for example, where there has been a 3 or 4 year run of profits subject to higher rate tax followed by a loss-making year, or other instances when there is an unexpected change in fortunes.

If in a farm partnership, calculations must be undertaken for each individual partner to see whether it is beneficial to make an election.

A year cannot be included in a 5-year averaging claim if it is a year which is prior to a tax year which has already been subject to a farmer averaging claim.

For example, if 2017/2018 and 2018/2019 profits have been averaged, a claim cannot then be made to average profits for the 5 years up to and including 2017/2018. This therefore limits the opportunity to use the 5-year option, but for many farmers the 2-year period will even out the liabilities reasonably well.

Detailed projections and a crystal ball to forecast how the next 12 months of trading are likely to turn out will assist in making a decision about a 5-year claim.

Discuss with us your thoughts and consider making a business plan so more informed business decisions can be made.