From 6 April 2016 farmers and market gardeners have been able obtain relief by averaging trading profits of the previous 2 or 5 consecutive years provided certain conditions are met. The relief recognises that farming profits can vary considerably due to many external factors such as weather and external markets, and the averaging process has the effect of smoothing out profit volatility.
In practical terms, the principal benefit for the farmer is a reduction in his or her income tax liability and payments on account, which improves overall tax efficiency and can help with cash flow.
The taxpayer must meet the following conditions:
- 2 Year averaging – the current and prior years must not be within 75% of one another;
- 5 Year averaging – the average of the previous 5 years profit and the fifth years must not be within 75% of one another; and
- Cannot be applied in year of commencement or cessation of farming trade.
Farmers in a farming partnership can independently decide whether or not to average and for 2 or 5 years.
As with all taxes and tax reliefs, the application of the Farmers Averaging can be complex. It is important to note that only farming profit can be averaged should the individual have other sources of income such as employment or rental this will not be included in the profit for averaging purposes.
Furthermore, this tax relief is only available for income tax and only available to farmers trading as sole traders or in farming partnerships. Farming companies cannot avail of the relief.
With respect to Tax Credit claims, the rules are different again and the non-averaged figure must be returned.
The above article is for general guidance and informational purposes only and is not intended to constitute legal or professional advice. It should not be taken as specific advice for your own circumstances and relied upon. You are advised to take professional advice before taking any action in relation to the above matters.