BIM55545 - Farming: herd basis: acquisition of new animals following a major disposal
S120 Income Tax (Trading and Other Income) Act 2005, S118 Corporation Tax Act 2009
If:
- within five years following the disposal of a whole herd, the farmer begins to acquire a new herd, or
- within five years following the disposal of a substantial part of a herd, the farmer begins to build up the numbers in the herd again,
then the new animals are treated as replacements (see BIM55535) of animals in the herd that was the subject of the earlier disposal up to the number of animals in that earlier disposal. These new animals' exclude any animals which are replacements for animals disposed of separately from the
substantial’ disposal, or which could reasonably be viewed as substitutes for animals awaiting disposal.
Where the profit or loss on the earlier disposal was left out of the trade computation under BIM55540, the proceeds of that disposal should now be included as trading receipts, to the extent that the animals are replaced, in the accounting period or periods in which the replacements are made.
However, in a case where the earlier disposal was due to causes wholly beyond the seller’s control (for example, a tenant farmer being given notice to quit and being unable to get a new farm at once), if the replacement is of worse quality, the amount included as a receipt is not to exceed the cost of the replacement animal.
The period of five years should be measured from the date on which the sale was completed. Where replacement has not begun within that period, any purchases thereafter will fall to be treated as additions, or as the initial cost of a new herd.
ANIMALS NOT REPLACED
Where the earlier disposal was of the whole herd and the new herd is smaller but the difference in size is not substantial (see BIM55525), the animals not replaced are treated as minor disposals (see BIM55550). To avoid reopening the figures for the period in which the sale was effected, the adjustment in respect of the profit or loss on their disposal may be brought into the computation for the period in which the replacement of the old herd was completed.
If the earlier disposal was not of the whole herd or the whole herd was disposed of but the new herd is substantially smaller than the old herd, then the treatment of animals not replaced is unaffected. Profits or losses on animals not replaced within the five year period remain outside the tax computation.
EXAMPLE 1
During her accounting year ended 31 December 2012 Maureen (see Example 1 in BIM55540 purchases a new dairy herd of 100 cows for £125,000.
- The acquisition of the new herd is within five years of the sale of the old herd so the new cows are treated as replacements of 100 cows from the old herd.
- The £100,000 (£120,000 x 100/120) proceeds of sale of 100 of the cows in 2009 are included as a trading receipt of the year ended 31 December 2012.
- The £125,000 cost of the new cows is an allowable deduction.
At 31 December 2012 Maureen’s herd account will show: 100 cows @ £1,250 = £125,000
Adjustments should be made to the tax computations to achieve a net deduction of £25,000.
As the new herd is smaller than the old herd but the difference (20 animals out of 120) is not substantial, the 20 animals not replaced are treated as minor disposals. The £4,000 (£20,000 - £16,000) profit on their disposal in 2009 is now brought into the computation of Maureen’s profit for the year ended 31 December 2012 (see BIM55550).
EXAMPLE 2
Between 30 September 2009 and 30 September 2012, Walter (see Example 2 in BIM55540) maintains his flock at the same size so the cost of the flock at 30 September 2009 is still:
- | Amount |
---|---|
180 ewes @ £40 | £7,200 |
5 rams @ £300 | £1,500 |
- | £8,700 |
During the year ended 30 September 2013, Walter purchases 100 additional ewes for £7,500 and 2 additional rams for £500.
- The acquisition of the new animals is within five years of the substantial disposal in the year ended 30 September 2009 so the new animals are treated as replacements of 100 ewes and 2 rams from that earlier disposal.
- The £6,000 proceeds from the sale of 100 ewes (100 @ £50) and 2 rams (2 @ £500) in that earlier disposal is brought in as a trading receipt of the year ended 30 September 2013.
- The £8,000 cost of the new animals is an allowable deduction.
At 30 September 2013 the herd account is:
- | Amount |
---|---|
180 ewes @ £40 | £7,200 |
100 ewes @ £75 | £7,500 |
5 rams @ £300 | £1,500 |
2 rams @ £250 | £500 |
- | £16,700 |
The herd has been partially restored and this should be reflected in the herd account (as above) even though the cost of doing so is allowable. This can be achieved by making the adjustment in the tax computation accompanying the accounts that is a net deduction of £2,000 (£8,000-£6,000).
Although the difference in size between the flock before the substantial disposal and the flock as now partially restored is not substantial, as the earlier disposal was not of the whole herd, the treatment of animals not replaced is unaffected. The profit on their disposal remains tax free unless they also are replaced within five years of the earlier disposal.