Being brought up on a farm, I understand how farming is an extremely volatile industry where profits fluctuate year on year as a result of many factors i.e. the British weather, global market, price elasticity and now we also have Brexit to consider. This means that under the normal tax rules, farmers could face a high tax bill in one year and a low tax bill in another and if cashflow is poor, it may be difficult to meet these tax requirements.
As a result, sole trade farmers or farming partnerships have the option to average their taxable trading profits over any two consecutive years, or any five consecutive years, with the averaged profit taxed in each year where the averaging has been carried out; and this is known as ‘Farmers Averaging’. This helps farmers by leveling out profits and reducing the risk of being unable to pay tax. It may also generate a tax repayment which could be much needed in a poor performance year.
To qualify for Farmers Averaging, the business must have been trading for a full two or five year period; commencement or cessation periods cannot be used in the calculation and this includes where partners join or leave a partnership. Averaging claims must be made within 12 months of the normal self-assessment filing date for the latest year to which the claim relates.
Farmers must also pass the following criteria to qualify for Farmers Averaging:
- For two-year averaging, the difference between the profits for the 2 years must be more than 25% of the profits of the year with the better result. You can’t make a claim where the difference between the profits is 25% or less
- For five-year averaging, the difference between the average of the previous four years’ profits and the fifth year’s profits must be more than 25% of the profits of the higher figure. You can’t make a claim where the difference between the profits is 25% or less
Where there is a loss in the business in any of the five or two years under consideration, the figure is treated as nil for averaging purposes and the loss is available for normal loss relief.
Alternatively, farmers can choose to keep it simple and ignore Farmers Averaging, simply paying the tax due on the taxable profits each year.
For further information, please contact us.
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