BIM73145 - Farmers' averaging: giving effect to a claim

A brief description of farmers’ averaging can be found at BIM73101. It describes how, when the conditions are met, the profits of two consecutive years can be equalised by means of simple averaging. Prior to SA this is exactly what happened, the profit for each of the years subject to a claim were added together and divided by two. Assessments were then changed to reflect the revised, averaged profits.

Under SA claims for averaging are governed by TMA1970/SCH1B and must be made in, or by amendment of, the return of the later year. In other words averaging does not affect the amount of tax due for the earlier year. The tax effect of averaging the two years’ profits is taken into account in the later year. See the example below.

In example 1 at BIM73130 the net tax due (including class 4 NIC) is:

These figures are computed as follows:

*Averaging claim adjustment is calculated thus - £10,444 less £7,591 = £2853.

Averaging claims are made in the return of the later year by including an averaging claim tax adjustment in that return. This adjustment can be positive or negative depending on whether the later year’s profits are higher or lower than the earlier year.

An averaging claim tax adjustment is the extent that the claim would have affected the earlier year had that assessment been amended. Where this generates a repayment see BIM73165.

To summarise, when a competent averaging claim is made:

• the assessment for the earlier year should not be amended,
• the assessment for the later year should reflect the averaged profit,
• an averaging claim adjustment should be calculated in terms of tax and included in the return for the later year.