BIM85601 - Farming losses: general
S66, S67 Income Tax Act 2007
Farmers do not control the two main factors affecting the results of their businesses; market prices and the weather. These and other factors (such as outbreaks of foot and mouth disease) may cause even the most efficiently managed farms to show losses from time to time. Various forms of loss relief are available to help in such cases (see BIM85000 onwards). In a minority of cases, claims for tax relief in respect of farming losses can present particular difficulty because:
- all UK farming is treated as the carrying on of a trade and is thus eligible for the loss relief provisions applying to trades - whether or not it meets the normal commercial criteria of trading (see BIM55110);
- people with income from other sources sometimes take up farming for the sake of recreation or the lifestyle or status which it offers rather than for genuinely commercial reasons.
Because of this, Parliament has enacted rules which prevent some farming losses being offset against non-farming income.
Restrictions on trade loss relief against general income
Where losses are sustained in farming activities of an essentially uncommercial nature, trade loss relief against general income (see BIM85015) is not available where either:
- where tax adjusted losses before capital allowances were incurred in each of the five previous tax years (see BIM85605 and BIM85620 onwards) (the ‘five year rule’), or
- the trade was not run on a commercial basis and with a view to the realisation of commercial profits (see BIM85605 and BIM85701).
The five year rule is generally more straightforward to use as it involves a mechanical test. It should be applied, subject to BIM85640 and BIM85645, in all cases where the conditions (see BIM85620 onwards) are satisfied. Cases where (1) above does not apply, but where the activities appear clearly uncommercial, should be considered for challenge under (2) above, subject to BIM85615 and BIM85701 onwards.
Restriction on early trade loss relief
Where relief by way of carry back in respect of losses sustained in the commencing years of a trade is claimed, a stricter test of commerciality than that at (2) above applies (see BIM85045).
Companies
The guidance in this chapter applies to unincorporated taxpayers. Similar restrictions apply to companies within the charge to Corporation Tax and these are described at CTM04600 onwards and CTM04710. Broadly, the guidance at BIM85620-BIM85645 can be applied to companies, substituting ‘accounting period’ for ‘tax year’.
Cash Basis
Farmers calculating their profits using the cash basis must use the loss relief rules at BIM70005.