Herd basis - Article Kelso : Rennie Welch

Herd basis

The black arts of the herd basis is akin to a rugby referee’s knowledge of front row play – they think they know what is going on but …….

Normally stock is valued at the lower of cost or net realisable value and this is known as the trading basis for valuation purposes.  Farmers can elect to use the herd basis which treats their herd or flock more like a capital asset.  In order to qualify for the election you need to have a production herd which can also be a flock however it should be borne in mind that the election would apply to the same species irrespective of the breed.  The cattle or sheep must be kept for the products that they produce i.e., progeny or any other product except one that could be obtained through slaughter so this is principally milk, eggs, or honey.  So a beekeeper could elect for the herd basis although one would not want to deal with the stock reconciliation.

Generally speaking the election applies to mature animals i.e., a female that has produced a calf or a lamb and for male animals when they have been first used for breeding.  That said some immature stock can be included if they are hefted.  This means that owing to the nature of the land, only stock reared on that land can be used as replacements to maintain the numbers in the flock.  It is important to note that this does not apply to closed herds and flocks for health reasons as this is unlikely to relate to the land. 

In practical terms the cost of any replacement animal brought in is allowed for tax purposes but where the stock numbers are increasing then the value of the animals bought would be added to the capital value of the herd or flock.  In addition, if the replacement animal is of much better quality then a view needs to be taken so that the improvement value is added to the capital sum of the herd or flock. 

The benefits of the election are that the maintenance cost is always allowed for tax purposes and if there is any disposal of the herd or a substantial part thereof then the profit is not taxed however if there is a deficit then no tax relief would be available.  It is important to realise that if the herd is then built up in part or in full within five years then the profit would actually come back into charge for tax.  The election is irrevocable and so great care must be taken when making that decision and it is not available to businesses that have had flocks and herd for many years unless there is a partnership change as there are tight time limits for making the election. 

It is a very interesting and complicated area for livestock breeders and worth consideration even if no election is ultimately made.

Gordon Chisholm
gordon.chisholm@renniewelch.co.uk

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