A combination of Covid-19 crisis, Brexit and the imminent transition from direct subsidy support to the Environmental Land Management Scheme (ELMs), has bought unprecedented levels of uncertainty to farming, with a big question mark as to what the future holds.
However, for livestock farmers who have recently acquired a production herd, using the herd basis of accounting for tax purposes could be advantageous.
Whether you operate as a sole trade, through a partnership or trading through a limited company, a farmer can adopt the herd basis.
As a rule, farm animals are allocated to trading stock within the annual farm accounts. However, some such animals which are kept primarily for the products they produce, or in breeding cases for their offspring, and as such are treated as capital assets. Therefore the herd is capitalised as a tangible fixed asset. UK tax law recognises this by giving the farmer the option of electing to use the herd basis.
Some examples of eligible herds include:
- Dairy herd
- Sucker beef herd
- Breeding flock
- Laying hens
- Sheep kept for fleece production
- Horses kept for breeding
However, there are some exclusions, where the herd basis cannot be used including:
- Working animals
- Horses kept for racing
- Flying flocks (kept for resale)
- Immature animals
- Animals kept only for fattening and slaughter
It is important to note the stock within a qualifying herd does not necessarily have to be of the same breed but
must be all of the same species.
Advantages and disadvantages of adopting the herd basis
The main advantage of the herd basis is that any profit/ loss of the herd, or a significant number (>20%) of the animals from the herd, is not taxable. Therefore, the herd basis can be used as an effective, longer-term tax planning tool. It is important to realise that if the herd is then built up in part or in full within five years then the
profit would come back into charge for tax.
So, for example, if a farmer is approaching retirement or considering ceasing a trade in which an eligible herd is used, if the herd basis had been adopted, he/she can dispose of the herd and make a tax-free profit.
It is important to remember the ongoing costs of herd maintenance are fully tax deductible, although the initial cost of the herd is not. The operation of the production herd under the herd basis is more complex, particularly around adding and removing animals from and replacing animals in the herd.
In practical terms the cost of any replacement animal brought in is allowed for tax purposes but where the stock numbers are increasing then the value of the animals bought would be added to the capital value of the herd
Ultimately the greater the difference between the initial cost of the herd and its value on disposal, clearly, the bigger the potential tax advantage to be had by adopting the herd basis.
Time limits for election
A herd basis election must be made in writing to HMRC. The election must be made within two years of the end
of the accounting period in which the herd is first kept for a company, or, for income tax payers, by 31 January falling two years after the end of the tax year in which the herd is first kept. An additional year is allowed if the year in which the herd is first kept is also the year in which the farming activities first began, for example a new entrant
in to farming.
The election is irrevocable and so great care must be taken and advice sought when making that decision. The herd basis election is not available to businesses that have had flocks and herd for many years unless there is a partnership change. If the herd basis is not already in place, and you think your business could benefit from it, take advice.
If the herd basis is not already in place, and you think your business could benefit from it, take advice.
View the full copy of our spring edition of Rural Intelligence for Farms & Estates here.