New rules for averaging which look set to be introduced in April 2016, and which will apply to unincorporated farm and market gardening businesses, are likely to see two options for averaging of farm profits.
One would allow the business to choose whether two or five years is the best option depending on volatility, or to opt for five years averaging regardless of volatility.
Susie Swift, Partner in the Landed Estates and Rural Business Group of UK top 20 Chartered Accountants Saffery Champness explains: "Farm incomes can fluctuate considerably from year to year. Influenced by factors such as weather, yield, world markets and consumer demand, farms - possibly more so than any other business - can lurch between profit and loss from year to year, making financial and pension planning extremely difficult if not impossible.
"Averaging was designed to take some of the sting out of the tax take where farm businesses could be paying the additional tax for a good year during a subsequent year when farm incomes were bumping along rock bottom. Given the pressure likely to be exacerbated by the threat of a poor 2015 harvest it is timely that farm averaging is back on the agenda.
The mechanism does not reduce the overall tax bill, except where a farmer is in two or more different tax brackets for each of the tax years concerned. If not, it simply spreads the liability evenly over two or, under the new rules, five years.
"Where farm businesses include, for example, rented or holiday accommodation, or income from other non-farming activity, then averaging is not available in respect of those profit sources.
"The new rules will enable two or more consecutive bad years to be taken into account and bring greater flexibility to the system, averaging out profits over five years as opposed to just two as under the current system.
"Inevitably however, whilst setting out to keep the system simple, potentially going back over five years will make it far more complex. Farm businesses and their advisors will need to be continually aware of where they are in a five year averaging period. In general however, any additional support offered to the sector which is too often hamstrung by volatility is to be welcomed."
