Due to the volatility of the faming industry, farming profits can vary significantly from one year to the next. The averaging relief available to unincorporated farmers is a means of evening out fluctuating trading profits for tax purposes. It is not available to companies.
Averaging relief applies to farming and market gardening trades carried on in the UK. This includes the intensive rearing of livestock or fish on a commercial basis for the production of food for human consumption. Exclusions apply to agricultural contractors and farms where the farming activity is part of a larger trade that includes substantial non-farming activities.
Averaging only applies to the taxable profits arising from farming activities. Other sources of income received by the farm, such as income from property letting, are not included.
For tax years up to and including 2015/16 full averaging relief was available for two consecutive tax years where the taxable profits of one year did not exceed 70% of the other. Marginal relief was available where the taxable profits of one year exceeded 70% but not 75% of the other.
Changes introduced in the Finance Act 2016 mean that from 2016/17 onwards the relief has been extended and it will be possible to make a claim to average taxable profits over either two or five consecutive tax years.
For two year averaging claims, the marginal relief referred to above will be withdrawn and full averaging will be available where the taxable profits of one year do not exceed 75% of the other.
For five year averaging claims, the taxable profits of the latest of the five tax years concerned will be compared to the average of the taxable profits for the first four tax years. Where one figure is less than 75% of the other an averaging claim will be available. A claim will also be available where the taxable profits of one or more of the five tax years concerned are nil.
Where a loss is incurred, the taxable profits for that year are treated as being nil for averaging purposes. Loss relief is then claimed in the usual way.
A claim for averaging relief is made on the Tax Return for the later of the tax years concerned. Whether a claim is beneficial and what period the claim should cover will depend on the specific circumstances of the individual concerned.
Averaging is not available for the tax years in which the trade commences or ceases or where profits are calculated on a cash basis.
Lynn Miller CTA ACA MAAT | lynn.miller@renniewelch.co.uk
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