Are you taking advantage of Farmers’ Averaging tax relief?

27 June 2019

You may have heard of Farmers’ Averaging but not be aware of exactly what it is or what it can mean for you and your business.  Averaging is a tax relief which can be applied to farming profits as long as certain conditions are met. 

Farmers’ Averaging works by allowing you to restate profits of either the last two or five years as the average for that time period. This allows you to flatten out the profits over the period and potentially reduce your tax liabilities.  You can choose which averaging option to use each year depending on what gives the best tax saving.

If we take an example of a farm’s profits over a five year period:

Tax Year Profits (£) Averaged Profits (£)
2018/19 50,000 37,400
2017/18 37,000 37,400
2016/17 37,000 37,400
2015/16 35,000 37,400
2014/15 28,000 37,400

 

The 2018 Harvest has produced a gross output per acre higher than the last five years, generally resulting in overall higher profits. Without using Farmers’ Averaging this additional profit could take the farmer into higher tax rates of 40 or 45%. By using Farmers’ Averaging we can make use of the lower profits in previous years to potentially reduce the tax burden considerably.

This is obviously a simplified example. The rules around Farmers’ Averaging are in fact very complex. In a partnership, each tax payer is considered separately. Companies cannot claim Farmers' Averaging Relief. When averaging, losses are taken as zero, with losses considered as a separate exercise.

Factors to consider include:

  • The order in which to offset both trading losses and Class 4 National Insurance losses 
  • The impact on previous historic loss claims
  • Different trades and capping of loss restrictions
  • Ability to make pension contributions and the tax relief thereon
  • The impact on student loan repayments
  • Child Benefit and the High Income Child Benefit Charge
  • The impact on tax payable on account

There is uncertainty within the industry as to how to apply the calculations and the implications of making a claim. H M Revenue and Customs (HMRC) have released very little guidance and in general, current tax software struggles to cope with the variations and interactions with other reliefs.

Ellacotts are very experienced in dealing with these issues and have recently undergone a detailed review with HMRC regarding Farmers’ Averaging calculations. This dealt with many of the issues listed above. HMRC agreed all our calculations, resulting in our client receiving a very significant tax repayment. 

Please contact your usual Ellacotts contact or Joanne Wright on jwright@ellacotts.co.uk or 01536 646000 if you’d like to make sure you’re taking full advantage of this relief.