Farmers and market gardeners in the UK may obtain relief by averaging the profits of consecutive years.
Full averaging relief can be claimed where the profits of one tax year are 75% or less of the profits of an adjacent year.
Averaging options
Finance Act 2016 extended the ability for profit averaging to five years and removed the marginal relief and there are now three options as below:
- two-year averaging
- five-year averaging (not available for creative artists)
- no averaging at all.
To carry out an initial review of an averaging claim, check that:
- The trade, profession or vocation is a qualifying one (see BIM84050)
- Where the trade is farming, market gardening or intensive rearing of livestock or fish, it is carried on in the UK.
- The claimant is not a company.
- The claim was made not later than the normal time limit, or, exceptionally, under the extended time limit for further claims.
- The claim covers two or five consecutive tax years.
- The profits dealt with by the claim are the trade profits after capital allowances and balancing charges.
- Of the profit figures, the lower figure is less than 75% of the higher figure.
The following conditions have to be met for averaging provisions to apply:
- for two-year averaging, the current year and prior year’s profits must not be within 75% of one another, ie the difference between the profits for the two years must be more than 25% of the profits of the year with the better result
- for five-year averaging, the average of the previous four years’ profits and the fifth year’s profits must not be within 75% of one another, ie the difference between the profits for 2019 to 2020 and the average of the profits for the four previous tax years must be more than 25% of the profits of the higher figure. This condition is also satisfied if any one of these years has nil profits or a loss. Those losses will then receive tax relief under the normal loss relief rules. The last year subject to the five-year averaging claim cannot already be subject to an averaging claim from a future tax year. As with a two-year claim, averaging claims must effectively be made in a consecutive order.
Averaging is NOT permitted:
- in the year of commencement or cessation of trade
- for other streams of income for the farmers such as letting of property, income from leisure activities or income generated from renewable energy etc
- for farming on a contract basis
- when using cash accounting
- for partners who joined or left during the averaging period
- no marginal relief is available after 1 April 2016
- for companies, including corporate partners
- for other bodies which are subject to corporation tax.
Losses – sideways relief
Most losses can be claimed against other income, but there are special rules which restrict your ability to claim if your farm is not commercial or if you had a run of losses (worked out before capital allowances) of more than five tax years.
Time limit and how to claim
The time limit for making the claim is the first anniversary of 31 January following the latest tax year covered by the claim (eg where the claim relates to 2018/19 and 2019/20, the time limit is 31 January 2022).
They are claimed in the tax return for:
- sole traders in box 72 Self-employment
- partners in box 11 Partnership pages
HMRC examples for computing averaging claim can be found within HMRC manual BIM84210 onwards.
You can see more on the return rules including worked examples and a look at the rules relating to the averaging profits of farmers on our technical advisory webpages .
Useful links
HMRC Helpsheet 224 for Farmers and market gardeners
HMRC Helpsheet 234 for Creative artists
ACCA examples for prior to 2016 changes
This article has been shared from ACCA In Practice, to whom copyright belongs. Whitefield Tax are an ACCA Member Firm