Extension of Farmer’s Averaging to 5 years

Following a lengthy period of lobbying, the NFU were pleased when the chancellor announced in the budget in March that he would extend the provision for Farmer’s Averaging to 5 years.

Farmer’s averaging is currently available over two years to smooth profits.  It is advantageous when a farmer’s top rate of tax is different in consecutive years.  When used effectively, averaging shifts profits from a higher rate of tax in one year to a lower rate in another year, resulting in a tax saving to the farmer.

The consultation period ended on 7th September and the suggested options available to farmers were rather more restrictive than expected.

The first option considered in the consultation is an annual claim based on the average of the previous 4 years taxable profits being less than 70% of the current year, or the current year taxable profits being less than 70% of the average of the previous 4.  In this case, all 5 years may be averaged to smooth out the profits.

The second option considered does not include the annual volatility test described above but is an irrevocable election for 5 years.  The profits for each of the 5 years following the election are averaged with the four years immediately preceding each respective year.  For example, an election made in 2016/17 to average profits from 2011/12 to 2016/17 would then remain in place until 2021/22.

Some farming clients may not wish to commit to an irrevocable election, perhaps as the rate of tax ultimately payable would be uncertain.  The recent regime around 100% Capital Allowances claims has also brought volatility in taxable profits and for many an inherent profit which remains to be taxed.  This would seem to be weighed against the merits of more consistent taxable profit levels and resultant consistency of tax payments.

Given the uncertainty and historic volatility of farming profits, along with the encouragement to increase diversification and continued effect of Capital Allowance claims, we are interested to see the results of the consultation and assess how the outcome will affect our farming clients.