BIM75615 - Farming losses: test of commerciality

ICTA88/S384 denies relief against general income etc (see BIM75605) unless the taxpayer can show that, during the period when the loss was sustained, the trade was being carried on on a commercial basis and with a view to the realisation of profit. For guidance on the meaning of ‘not on a commercial basis’ see BIM75705; and with a view to the realisation of profits see BIM75710.

The provision was first introduced in 1960. The Chancellor of the day stated in the course of a Parliamentary debate on the Section:

“we are after the extreme cases in which expenditure very greatly exceeds income or any possible income which can ever be made and in which, however long the period, no degree of profitability can ever be reached”.

These words should be borne in mind when considering the application of the Section to farming cases. The small farmer and the farmer farming marginal land genuinely trying to make a living from their farms in difficult circumstances are not caught.

Nor does the Section be used to deny relief to a farmer who incurs temporary losses while establishing an enterprise, for instance by building up a production herd or bringing land back into fertility, provided the enterprise in which he or she is engaged is likely in due course to become an economic undertaking. For example, it may take a farmer five years to clear and work land infested with bracken before there can be an expectation of profit. Relief under ICTA88/S380 should not be refused on the initial losses in such a case.

General guidance on Section 384 may be found at BIM75700 onwards. Where the application of the Section is contested in a case involving a farming loss, a report should be made to CT&VAT (Technical) before listing the claim for hearing by the Commissioners.