Farming profits can fluctuate quite significantly on an annual basis and the possibility of averaging profits over a two year period is a well known feature of the tax system that applies to farmers. Whilst this provision still exists, it is now possible for farmers to average their profits for a five year period.
It is anticipated that this will be of benefit to a number of farmers in the future. Whilst there is no substitute for performing the actual calculations there are some general principles that are likely to apply.
1. If there is a year when personal allowances are not fully used then it may be possible for the profits to be averaged to use some of the wasted allowances.
2. Where losses have been incurred in a tax year then averaging could result in a potential reallocation of these so that tax is reduced.
3. Where higher rates of tax have been paid then the five year averaging may enable some of those profits to be taxed at the basic rate of tax.
An averaging claim can result in a reduction in the tax liability in the most recent year and this can also have the benefit of reducing the payments on account.
There are a number of other reliefs that can be relevant to the tax calculation so that care is needed when considering the overall tax position. It is important to ensure that these reliefs are fully taken into account.
We are able to help perform the calculations for both the 2 year and 5 year averaging provisions and advise on the best course of action to follow. For any further information, please contact a member of the Agricultural Team.
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