Farm profits can fluctuate wildly from year to year due to many uncontrollable factors, from the weather to world commodity markets. This means that in one year you may have a very high tax bill, and in another nothing to pay.
In order to remedy the fluctuations, you can make a Farmers' Averaging Election and average your profits over either a two or five year period. Used correctly, these elections can substantially reduce your tax bill and improve cashflow.
The two-year averaging election has been in place for some years, whereby profits from two consecutive years can be averaged if the profit from one year is less than 75% of the profit of the other year. The adjustment results in each year’s taxable profit being half the total of both years.
The five-year averaging rule was introduced on 6 April 2016, so you now have the added option of averaging profits over five consecutive years. A ‘volatility condition’ needs to be met in order to claim the five year relief.
The relief is available to sole traders and partnerships, but not limited companies.
Over the last few years we have saved our farming clients over £120,000 every year just through Farmers' Averaging Elections. For more information, please contact us to arrange a free initial meeting.