HMRC attacks farm losses
HMRC continue to attack farm losses and to deny sideways loss relief to genuine commercial farmers. Many will be familiar with the restriction on sideways loss relief for farmers who have suffered five successive years of losses. The provisions prevent relief for losses being claimed against other income in the sixth year, resulting in increased tax bills
There is often a misunderstanding that this restriction only applies to ‘hobby’ farmers. It doesn’t and over the last year we have seen increased activity by H M Revenue and Customs (HMRC) applying the restriction.
The restriction will not apply where the farming activities meet the reasonable expectation of profit test. The wording of this test is unclear, however effectively; to meet this test the farmer must show that:
a. he is a competent farmer,
b. there is an expectation of profit, and
c. a hypothetical competent farmer would expect the same period of loss as that incurred by the actual farmer.
This test is designed to deny loss relief where the activities could never make a profit, however efficiently they were carried out. An example would be a farm where the fixed overheads were such that the gross profit could not exceed them. The onus is on the farmer to produce evidence to justify his claim of a reasonable expectation of future profits.
In the case of French v HMRC  UKFTT 940, the Tribunal considered whether the objective of the tax law was to stop a farmer from enjoying sideways loss relief in excess of five years continuous losses if the actual farmer has been slower in achieving profit than a hypothetical competent farmer
The Tribunal emphasised that to deny relief to competent farmers seemed illogical and they tried to find an interpretation of the legislation that would give a sensible result. Their view was that the legislation could have been better worded to avoid confusion and ambiguity. They thought that if the taxpayer is competent, the actual period of losses may indeed be an indication of what the hypothetical competent farmer would anticipate.
This case suggests that for the active working farmer, if he is a competent farmer, the actual period of losses suffered may be an indication of what the ‘hypothetical competent farmer would anticipate. However, a true ‘hobby farming’ activity will continue to be met with resistance from HMRC.
Unfortunately HMRC’s view is different and they are continuing to deny sideways loss relief to genuine commercial farmers. Of particular concern is the inability to claim relief for a loss incurred due to unforeseen circumstances. For example, if the loss is incurred due to a fall in milk price, a poor harvest, floods or other unexpected costs, outside of the farmers control, those losses cannot have been expected at the beginning of the period so the test at c) above would fail.
With farming profitability low and losses likely to be incurred in many cases, retaining evidence of competent farming, and of when profits are expected, is crucial, if losses are to be offset against other income, to minimise the tax bill.
While HMRC Attacks Farm Losses , we will be lobbying government on this subject and helping as many clients as possible. Please do not hesitate to contact our specialist agricultural team for advice if required.