Herd Basis

The herd basis is a special method of working out profits or losses which may be used by farmers who keep production livestock. If you use the herd basis you will want to keep records. This is so that you can identify the figures to be used when applying the special rules.

As a general rule, farm animals are dealt with as trading stock within the annual accounts. However, some animals are used purely to obtain products or in order to breed. In such cases, the herd can be regarded as being a capital asset of a farming business. Should a farmer wish for their livestock to be regarded as being capital assets, they can elect for the Herd Basis to apply.

Some eligible herds include:

• Dairy herd
• Sucker beef herd
• Breeding flock
• Laying hens
• Sheep kept for fleece production
• Horses kept for breeding

However, there are some exclusions, where the herd basis cannot be used including:

• Working animals
• Horses kept for racing
• Flying flocks (kept for resale)
• Immature animals
• Animals kept only for fattening and slaughter

It is important to note the stock within a qualifying herd does not necessarily have to be of the same breed. However, they must all be of the same species.

The treatment for the purpose of computing farming profits of the herd or herds covered by the election is governed by the special rules. Very briefly they are:

• the initial cost of the herd is not an allowable deduction. Nor is the cost of any subsequent increase in herd size.
• the net cost of replacing animals in the herd (but not any element of improvement) is an allowable deduction
• where the odd animal, or just a few animals (amounting to less than 20% of the herd), are sold from the herd and not replaced, the resulting profit or loss is taken into account in arriving at the farming profits
• where the whole herd, or a substantial part (20% or more) of the herd, is sold and not replaced, the resulting profit or loss is not taken into account

It is important to remember the ongoing costs of herd maintenance is fully tax deductible, although the initial cost of the herd is not. The operation of the production herd under the herd basis is more complex, particularly around adding and removing animals from and replacing animals in the herd.

Time limits for election

A claim for the herd basis election must be made in writing to HMRC within two years of the end of the accounting period for a company and by 31 January falling two years after the end of the tax year in which the herd is first kept. An additional year is allowed if the year in which the herd is first kept is also the year in which the farming activities first began. So, a new entrant into farming for example!

This election is irrevocable so please do seek advice before making such an election. The herd basis election is not available if you have had flocks or herd for many years unless there is a partnership change. If the herd basis is not already in place, and you think your business could benefit from it, please take advice.