Farmers Averaging

Special Tax Treatment for Farmers

Provided certain conditions are met, special tax treatment is available to farmers. They are allowed to average their profits for tax purposes over either a two-year or five-year basis.

Scope of Farmers Averaging

The farmers averaging only extends to farming profits after capital allowances. Other sources of income like rental from investment properties cannot be included within the averaging claim. So, please bear this in mind!

Eligibility Criteria

Five-Year Averaging

For five-year averaging – The difference between your profits for the year in question and the average of the profits for the 4 previous tax years must be more than 25% of the profits of the higher figure. This condition is also satisfied if any one of these years has nil profits or a loss. You cannot make a claim where the difference between the profits is 25% or less.

Two-Year Averaging

For two-year averaging – The difference between the profits for the 2 years must be more than 25% of the profits of the year with the better result. You cannot make a claim where the difference between the profits is 25% or less. The profits of any one of the two or five years under consideration is nil for the purposes of averaging if a loss has been recorded. Loss relief claims can then be made in the usual manner.

Purpose of the Averaging Scheme

The averaging scheme intends to protect farmers from excessive exposure to higher rates of tax in years of good profitability.

Farmers in Partnerships

If you are part of a farming partnership then you can claim averaging irrespective of what the other partners do. This will be determined based on your personal circumstances.

Restrictions on Averaging

Averaging is not permitted for contract farmers, where the cash basis of accounting is used or when the trade is ceasing.