The importance of evidencing commerciality

With many farming and estate businesses facing sustained pressure on profits, investment income and managed portfolios often keep clients in the black. Trade losses may be relieved against other income, but HMRC could scrutinise losses arising from new diversifications or established farming businesses operating on tight margins.

Rural businesses are often closely integrated with their owners’ personal lives, blurring the boundary between business and lifestyle. During an HMRC enquiry or following a death, evidence that a business is commercial may therefore be questioned, even where losses arise only in some years.

If HMRC successfully argues that an activity was not carried on commercially with a view to profit, sideways loss relief against other income will be denied.

Successive losses may also prompt HMRC to question whether the trade offers a reasonable expectation of profit.

For farming businesses, sideways loss relief is denied where losses, calculated before capital allowances, were incurred in each of the five preceding tax years.

For inheritance tax, qualifying agricultural property may attract Agricultural Property Relief (APR), subject to the limits applying from April 2026. Business Property Relief (BPR) requires evidence of a business and uses a wider concept of “business” rather than “trade”. For woodland, let property, storage and diversified estates, it is important to distinguish trading from investment activity. There must first be evidence of a business carried on for gain and managed with a view to profit.

HMRC historically used the six indicators identified in the 1981 Lord Fisher VAT case. Since 2022, its VAT policy has applied a two-stage test:

i. Is there an activity that results in a supply of goods or services for consideration? 

ii. Is the supply made to obtain income?

Although VAT-specific, this framework may be useful when considering other taxes.

A whole-business analysis is essential; if one activity is loss making, consider whether the business as a whole satisfies the ordinary commerciality test on its facts.

HMRC may request relevant evidence when deciding whether a commercial business is being carried on. Relevant evidence can include:

• minutes recording active commercial decisions;
• business plans setting out strategy and operations;
• profit projections showing a realistic route to profitability;
• regularly reviewed cashflow and budget forecasts, including input costs and cropping or stocking plans;
• staff contracts, timesheets and mileage records;
• supplier and customer invoices and contracts.

Sound commercial governance, supported by contemporaneous evidence, will make future HMRC questions easier to address. At Albert Goodman, we help clients critically review their plans so that their businesses remain robust, viable and sustainable.