The new extended averaging rules were initially announced in the 2015 Budget but have only recently come into effect.
From 6 April 2016 farmers are able to average their profits for income tax purposes for a period of up to five years, rather than the normal two-year period. It is expected that this could benefit over 29,000 farmers, saving an average of £950 a year. Averaging profits over a number of tax years helps farmers to better manage fluctuating profits which might arise as a result of weather, disease, risk and the impact of global volatility, something which seems to happen more and more frequently.
Farmers can still average over a two-year period if they wish but will now have the option to average over a five year period instead. Claims will be subject to certain volatility conditions and will be made retrospectively, as under the previous rules. The new five-year rule will not apply to individuals whose profits are derived from creative works, however, they will still be able to claim to average their profits under the existing two-year period rules. It will be necessary to consider the position on a case by case basis to ascertain whether it is more beneficial to average over a two year or five year period, or not at all. Good record keeping is essential to benefit from the new extended averaging rules and manual calculations are required to work out if the averaging of profits is worthwhile
Good record keeping is essential to benefit from the new extended averaging rules and manual calculations are required to work out if the averaging of profits is worthwhile. For farm businesses that have four partners, at least 20 calculations will be required.
If you would like to discuss this further then please get in touch, our expert agricultural tax team would be delighted to answer your questions on the new extended averaging rules.