BIM73130 - Farmers' averaging: full averaging

Where the difference between the profits of two consecutive years of assessment is 30% or more of the higher of the two figures of profit (and regardless of whether the difference is a rise or a fall), the profits of the two years may be averaged. The profit of the later year becomes the sum of the 2 profits divided by 2. The profit of the earlier year is unchanged, but the tax due for the later year is adjusted up or down to take account of the effect on the earlier year had the profit been adjusted on the same basis as the later year. See BIM73145.

In pre-SA cases the sum of the two profit figures is simply divided by two and the resulting figure becomes the chargeable profits for each of the two years of assessment.

Losses

A trading loss is treated as a nil profit for averaging purposes (see Example 2). This enables the loss relief to be claimed under the normal rules without the measure of the loss available for relief being affected by averaging.

Example 1 – normal averaging

Profits from an established farm business are as follows:

The farm profits, after capital allowances chargeable under Case I of Schedule D, are therefore as follows -

A claim for averaging the profits is made before 31 January 2005.

The claim is competent because the difference of £16,000 exceeds 30% of the higher figure of £40,000. The averaged profits are therefore £40,000 + £24,000 divided by 2 = £32,000 for each year of assessment.

The assessment for 2001-02 remains unaltered at £40,000 while the 2002-03 assessment is increased to the averaged profit of £32,000 but also includes a tax adjustment equal to the reduction in the tax charge for 2001-02 had the assessment been reduced from £40,000 to £32,000. See BIM73145 for a more detailed explanation and example.

If this example had used pre–SA years, for example 1994-95 and 1995-96 the chargeable profits assessed for each of the two years would have changed to £32,000.

Example 2 – averaging where there is a loss in one year

A farmer has the following results:

The profits before averaging are therefore:

but averaged profits become:

Note the assessment for 2001-02 remains at £50,000. See BIM73145 for how relief is actually given.

The £10,000 loss is available under ICTA88/S380 for 2001-02 or 2002-03 or under ICTA88/S385 against the 2003-04 assessment on farming or for carrying forward.