Date26 Aug 2021
Farmers may average their profits for tax purposes so long as they meet certain conditions. This has the effect of smoothing out the impact of varying profit levels, and therefore also creating more regular and predictable tax payments for farmers.
Since 6 April 2016, farmers have had the ability to average their profits for tax purposes over any two or any five consecutive tax years. This is, of course, not mandatory and farmers may choose to pay their tax liabilities as they arise.
How it works
Averaging is available where the farmer passes a ‘Volatility Test’.
If any of the conditions of the volatility test are met, the farmer can average their profits over the required number of years and use the average figure as their taxable profit in each of those years, flattening out the annual tax cash payments and even in some years, receiving a refund. The relief is particularly useful when farmers’ profits make them liable for higher rate tax in some years, and not in others.
Partners in a farming partnership can independently decide whether they wish to make an averaging claim and enter it on their individual tax returns.
Averaging claims must be made within 12 months of the 31st of January following the end of the relevant tax year.
Mrs Farmers' farming profits have been as follows in the last two years:
Year ended 31st March 2020 £132,417
Year ended 31st March 2021 £96,664
The latter year is 73% of the previous year so not within 75% and averaging is therefore possible. Mrs Farmer needs to make a claim by 31st January 2022 to be assessed on £114,540 for both years.
More information can also be found on HMRC’s Farmers and Market Gardeners’ Help sheet 224 here.