Tax for Farmers and Market Gardeners

Introduction

If you operate a farming or market gardening business, you can access several special tax rules designed to address the unique challenges of agricultural work. These include the ability to average your profits over multiple years to smooth out volatile income, special treatment for livestock herds, and particular methods for valuing farm stock.

Who these rules apply to

These special tax rules and reliefs are available to farmers and market gardeners who prepare their accounts on an accruals basis (where you record income when earned and expenses when incurred, rather than only when money changes hands). The rules recognise that agricultural businesses face distinct challenges, including unpredictable income due to weather, disease, and market conditions.

Farmers' averaging relief

Agricultural profits can fluctuate significantly from year to year. Farmers' averaging relief allows you to smooth out these fluctuations by averaging your profits over multiple years, which can reduce your overall tax bill and prevent you from being pushed into higher tax brackets during exceptionally good years.

This relief means you calculate tax based on an average of your profits rather than the actual profit in each individual year. When you average profits and find that you've overpaid tax in earlier years, you can claim a refund. Conversely, if you've underpaid, you'll need to pay the additional amount due.

Herd basis

The herd basis is a special way of treating livestock kept for ongoing production purposes (such as dairy cows, breeding cattle, or laying hens) rather than for immediate sale.

Under normal tax rules, livestock would be treated as trading stock, with changes in the value of your herd affecting your taxable profit each year. The herd basis allows you to elect for different treatment: the initial cost of purchasing a production herd is not deductible, and subsequent changes in herd value don't affect your taxable profits. This means you don't pay tax when your herd increases in value, but you also don't get relief when it decreases.

You can claim relief when you replace animals within the herd – the cost of replacement animals (minus any sale proceeds from the animals being replaced) can be deducted from your profits. If you sell your entire herd, any profit on the sale is tax-free, but any loss is not deductible.

The herd basis must be elected for – it doesn't apply automatically. Once you've made the election, it continues to apply unless you withdraw it.

Farm stock valuation

Valuing your farm stock correctly is essential for calculating your taxable profit. HMRC accepts several methods for valuing different types of farm stock:

Livestock: You can value livestock at cost (what you paid for them) or at their market value at the end of your accounting period. For home-bred animals, cost includes the breeding and rearing expenses.

Growing crops: These are valued at the cost incurred in growing them up to the end of your accounting period, including cultivation, seed, fertiliser, and sprays.

Harvested crops: These should be valued at the lower of cost or market value.

Deemed cost valuation: In some circumstances, you may be able to use a deemed cost valuation, which can simplify the valuation process.

The method you choose must be applied consistently from year to year. You also need to consider how grants and subsidies affect your stock valuations – these may need to be taken into account depending on their nature and purpose.

Buildings and structures allowance

Farmers and market gardeners can claim capital allowances on certain buildings and structures used in their business. This allowance lets you deduct a portion of the cost of qualifying assets from your taxable profits over time.

Losses

If your farming business makes a loss, you have several options for relieving that loss against other income or profits. The loss relief rules for farmers follow similar principles to other businesses, but you need to be aware of how they interact with farming-specific reliefs like averaging.

Compensation for compulsory slaughter

If you receive compensation because your livestock must be compulsorily slaughtered (for example, due to disease control measures), special tax rules apply. The treatment of this compensation depends on whether you use the herd basis and the specific circumstances of the payment.

Agricultural land loss relief

If you rent out agricultural land as part of a property business and make a loss, you may be able to claim additional loss relief beyond what's normally available for property losses. This relief recognises the particular challenges of agricultural lettings.

To access this relief, you must be letting land that's actually used for agricultural purposes, and the relief applies when calculating losses in the UK property pages of your Self Assessment tax return.

What to do next

If you operate a farming or market gardening business, review whether you could benefit from these special rules. Farmers' averaging relief in particular can provide substantial tax savings if your profits vary significantly year to year.

The herd basis election requires careful consideration, as it's a long-term decision that affects how you're taxed on your production animals. Stock valuation methods also have ongoing implications for your reported profits, so it's important to adopt an appropriate and consistent approach.

Sources

• Check reliefs and rules for farmers and market gardeners (Self Assessment helpsheet HS224)
• Farm stock valuation (Self Assessment helpsheet HS232)
• Agricultural land loss relief (Self Assessment helpsheet HS251)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.