Chapter 22 Farmers Flashcards
22.1 Two year Averaging of profits
The legislation allows profits to be averaged in certain situations between two consecutive tax years and also five years in certain situations. The two-year averaging rules are contained in s222 ITTOIA 2005. This is possible where the profits of the lower of the two consecutive tax years are less than 75% of the profits of the higher year. The profit we average is tax adjusted profit, which is after deducing capital allowances. If there is a loss we take nil to be the profit figures in any averaging computation.
22.3 Five-year averaging
Contained in s222A ITTOIA 2005. This is possible where the volatility condition is satisfied. The profits of the fifth tax year are compared with the average of profits from the four previous years, the condition is met if the lower amount is less than 75% of the higher amount. The volatility condition is also met where the profits of one or more of the five tax years is nil.
22.4 Averaging claims
Claim must be made by the first anniversary of 31 January following the end of the last tax year. Claims must be made in chronological order; the claim belongs to the later of the relevant years and therefore any increase or decrease in an earlier year’s tax liability is adjusted in the balancing payment for the last year.
22.5 Herd basis
Typically animals used for a production herd are treated as trading stock. However a farmer can make an irrevocable election for the herd basis. If an election for the herd basis is made the animals are not treated as trading stock but as a fixed asset. The initial cost is not deductible in arriving at trading profits. However when an animal is sold from the herd and replaced the sale proceeds are taxable as a trading receipt and the cost of the new animal is allowable as a deduction in arriving at taxable profits.
The election must be made by the anniversary of 31 January following the end of the tax year in which the first period for which the farmer keeps the production herd ends.
