BIM55190 - Farming: receipts and expenses: method of allowing spreading relief

Relief under extra-statutory concession ESCB11 (see the second sub-paragraph of BIM55180) should be allowed as follows:

A) Sole traders

Where an individual who is farming as a sole trader wishes to have the relief:

• the total ’profit on compensation' arrived at as in BIM55185 is deducted in computing the trading profit or loss of the accounting period in which the slaughter took place, and
• one third of such profit is added to the chargeable trading profit for each of the first three following years of assessment.*

(* ‘following year of assessment' means a year of assessment subsequent to that in which the slaughter took place, and whose basis period does not include any part of the accounting period in which the slaughter took place.)

Losses

Where a trading loss is sustained in the basis period for any of those three following years, one third of the profit on compensation should be included in the computation so as to reduce the loss or, as the case may be, create a profit.

Trade ceasing

The normal practice is modified where, due to the cessation of trading, there are less than three subsequent years of assessment over which to spread the profit. If the trade is permanently discontinued:

• In a year of assessment for which the basis period is, or includes any part of, the accounting period in which the slaughter took place, the spreading arrangements should not be applied and the full amount of the compensation should be included as a trading receipt of the accounting period in which the slaughter took place.
• In the first ’following year of assessment', one half of the ’profit on compensation' should be added to the chargeable trading profits (or deducted from the trading losses) for each of the penultimate and final years of trade (see Example 4).
• In the second ’following year of assessment', one third of the ’profit on compensation' should be added to the chargeable trading profits (or deducted from the trading losses) for each of the last three years of trade (see Example 5).

Example 1 (continuing trade)

In an established trade, slaughter takes place during the accounting year ended 31 December 2000 and the taxpayer requests spreading relief. The ‘profit on compensation' should be deducted in computing the trading profit or loss of 2000-01 and one-third should be added to the chargeable trading profits (or deducted from the trading losses) for each of the years 2001-02, 2002-03 and 2003-04.

Example 2 (continuing trade, pre-self assessment and including transitional period)

In an established trade, slaughter takes place during the accounting year ended 31 December 1993 and the taxpayer requests spreading relief. The ’profit on compensation' should be deducted in computing the trading profit or loss of 1994-95 and one-third should be added to the chargeable trading profits (or deducted from the trading losses) for each of the years 1995-96, 1996-97 and 1997-98.

Example 3 (commencing trade)

A dairy farmer commences trading on 1 July 1998 and produces accounts to 31 May annually.

• If slaughter takes place during the accounting period 1 July 1998 - 31 May 1999 (which provides the basis period, or part of the basis period, for both 1998-99 and 1999-2000), the ’profit on compensation' should be excluded from the computation of the trading profit or loss of the accounting period and one-third included for each of the years 2000-01, 2001-02 and 2002-03.
• If slaughter takes place during the accounting period 1 June 1999 - 31 May 2000 (which provides the basis period, or part of the basis period, for both 1999-2000 and 2000-01), the ‘profit on compensation' should be excluded from the computation of the trading profit or loss of the accounting period and one-third included for each of the years 2001-02, 2002-03 and 2003-04.

Example 4 (ceasing trade)

Slaughter takes place during the accounting year ending 30 September 1998 and the trade ceases on 30 November 1999. If the farmer requests spreading relief, the ‘profit on compensation' is deducted in computing the profit or loss of the accounting year and one half is added to the chargeable trading profits (or deducted from the trading losses) for both 1998-99 and 1999-2000.

Example 5 (ceasing trade)

Slaughter takes place during the accounting year ending 30 September 1998 and the trade ceases on 30 November 2000. If the farmer requests spreading relief, the ‘profit on compensation' is deducted in computing the profit or loss of the accounting year and one third is added to the chargeable trading profits (or deducted from the trading losses) for 1998-99, 1999- 2000 and 2000-01.

Interaction between spreading relief and farmers’ averaging Adjustments for spreading relief should be made before adjustments for farmers' averaging.

B) Partnerships

Under pre SA rules

Where farming is carried on by a partnership, which commenced trading before 6 April 1994, and the slaughter, takes place during or before the partnership accounting period ending in 1996-97, spreading relief should be requested by the partnership. The profits of the partnership as a whole should be adjusted in the same way as those of a sole trader (see (A) above). In cases where the commencement or cessation rules apply to particular partners during the three year period over which the profit is spread you should negotiate a reasonable basis of spreading which ensures that the whole of the profit is taxed.

Under SA

Where farming is carried on by a partnership which commenced trading on or after 6 April 1994, or in any case where the slaughter takes place after the end of the partnership accounting period ending in 1996-97, spreading relief should be requested by the individual partner. The individual's share of the partnership profits should be adjusted in the same way as those of a sole trader (see (A) above) using the appropriate proportion of the ‘profit on compensation'.

C) Farming companies

The compensation profit should be excluded from the accounting period in which the slaughter takes place and treated as accruing evenly over the subsequent three accounting periods from the end of that accounting period or, if the farming trade should cease within the period, up to the date of cessation.