BIM55180 - Farming: compensation received for compulsory slaughter of animals

Under the Animal Health Act 1981 DEFRA operates a slaughter policy with compensation for dealing with certain serious animal diseases. (In addition to DEFRA compensation, farmers may also receive compensation under an insurance policy - see BIM55195.) DEFRA compensation paid is normally treated for tax purposes as follows -

i) Where the animals form part of the farmer's trading stock, as a trading receipt of the accounting period in which the slaughter takes place.

ii) Where the animals are members of a herd forming the subject of a herd basis election (see BIM55500 onwards), as `proceeds of sale'.

EXTRA-STATUTORY CONCESSION ESC/B11

Where (i) applies, the accounts for the year of slaughter are likely to show an abnormal profit on livestock account and consequently to give rise to an abnormally heavy tax liability for the corresponding year of assessment. To meet this problem, extra-statutory concession ESC/B11 provides a spreading relief whereby the compensation profit is removed from the accounts of the year of slaughter and one third of it is charged in each of the three following years. The concession applies equally under Self Assessment but the years affected are different. The way it operates is explained with examples at BIM55185 - BIM55190.

It is worth noting that in the particular circumstances of the 2000 - 2001 Foot and Mouth outbreak, the terms of ESC B11 were relaxed on 2 fronts (a) the compensation profit on animals which could be but are not on the herd basis following a late election under ICTA88/SCH5/PARA6 (see also ITTOIA/Part 2/Chapter 8 for periods after 5th April 2005) should not be excluded from this spreading relief, and (b) the definition of slaughtered animals covered by this concession is extended to include those slaughtered under the Welfare Scheme, in firebreak zones and those simply that came into contact with Foot and Mouth disease.

Where (ii) applies, and the animals slaughtered constitute the whole, or a substantial part, of a `production herd', the compensation receipts are brought to the credit of revenue account only when the corresponding replacement animals join the new herd. Farmers receiving compensation who have not previously elected for the herd basis and whose herds have been compulsorily slaughtered on account of disease are permitted under ICTA88/SCH5/PARA6 or ITTOIA/Part 2/Chapter 8 to make a retrospective herd basis election to include the year of slaughter (see BIM55605).