We have been able to average taxable farming profits for individuals for many years. However, we are now dealing with the new rules for farmers averaging which apply for accounting years ending in the 2016/17 tax year and subsequent years. The new rules allow averaging to take place over five years or two years.
Five-year averaging is available if a loss arose in at least one (but not all) of the five years or the profits of the relevant year, or the average of the previous four years profits is less than 75% of the other.
Clearly, five years averaging will be beneficial for businesses where there has been substantial volatility such as the dairy, potato or pig sectors. In addition, where a business has made a significant investment in capital expenditure on the farm, resulting in a large annual investment allowance being claimed, the profits will be lower in that year so five year averaging could reduce the overall tax liabilities.
Farmers’ averaging is claimed by the individuals in the business rather than the business itself. The benefit of a claim can only be judged on a case by case basis as each individual will have different financial circumstances outside the business. The calculations are complicated but can result in substantial tax savings.
If you would like to take advice on farmers averaging- please do not hesitate to contact our expert agricultural team