This is day 8 of our Tax & Accounting at Christmas Special, as we analyse the tax and accounting treatments of all things Christmassy and open a door in our Christmas Advent calendar to count down each working day until the Christmas holidays in the UK. 

Shepherds and Farmers

The shepherds may be watching their flocks at night, but during the day like all farmers they are busy running a business. Most farming businesses are run as sole traders or partnerships.

Accounting

  • As unincorporated businesses they can choose whether to use the Cash basis or the accruals basis. 
  • Accounting for stock and work in progress including livestock and growing crops is only necessary if you are using the accruals basis.
  • The herd basis can be used to account for stock when animals are kept for production rather than for resale. 

Tax

Expenses:

  • Expenses must be incurred Wholly and exclusively for the farming business to be deductible.
  • Private use adjustments will be required where the farmer lives on the farm and for vehicles where there is private use.

Staff Benefits:

The farmhouse:

  • A proportion of the running expenses of the farmhouse can be deducted from trading profits to reflect its use as the centre of business operations on the farm.
  • The type of costs that can be claimed depend on whether the business is claiming Flat (fixed rate) deductions or Actual costs

Assets used on the farm:

  • Capital allowances are available for many items which are more in the nature of a building or structure when they are used in a farming business, such as silos, milking parlours, sewerage systems.
  • See Farming: Capital allowances for a full list.
  • Private use adjustments will be required for vehicles that are used privately.

Averaging relief:

  • A special relief is available to farmers and Market gardeners to prevent them from suffering high effective rates of income tax due to fluctuations in their trading profits by enabling them to average the profits of one year with the next.
  • See Farmers Averaging Relief for full details of how the calculations work 

Inheritance tax:

  • Relief from IHT is available where Agricultural property relief (APR)  applies. The land must have been occupied for the purposes of agriculture.

VAT and farming

Most farming activity will be zero rated.

  • Diversification activities such as camping, shooting, fishing and holiday letting will be standard rated. 
  • The letting of surplus farm buildings or cottages for residential use will be exempt.

Flat rate scheme:

A special Agricultural flat rate scheme is available for farmers:

  • It applies to crop production, stock farming, forestry and fisheries
  • If using the scheme you must deregister for VAT and no VAT is charged on supplies.
  • A 4% additional flat rate is added to sales of qualifying supplies to VAT registered customers which can be kept by the farmer as compensation for losing input tax on purchases.

Difficult areas:

APR:

  • APR is only available on land to the extent of the agricultural value. Business property relief (BPR)  may be available for land values in excess of the agricultural value where the land is in use in a business.
  • Farmhouses  may qualify for APR if they are used in connection with agricultural land or pasture and are of a character appropriate to it.

Letting:

  • Income from letting is prima facie an investment activity so not eligible for BPR; including letting caravans, yurts, land for camping, or glamping. Additional services must be provided above and beyond just letting property to show that the letting business is not one of wholly and mainly holding investments. See Business Property Relief
  • Income will generally be property income and excluded from averaging profits.

Loss relief:

  • The trade must be commercial in order for farming losses to be available for set off against other income (sideways loss relief).
  • Sideways loss relief is no longer available after five years of losses, even if the trade is commercial, unless the reasonable expectation of profit test is met.
  • See Losses (sideways): restriction for uncommercial trades.

Links to our subscriber guides:

Farming
This guide sets out what is classed as farming (and what is not) and how it is taxed.

A-Z guide: Farmers: what expenses can I claim? 
This guide outlines what expenses farmers can claim for tax purposes.

Farmers’ Averaging Relief 
What is averaging relief, how does it work and when does it apply?

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