A combine harvests a cereal crop

Sideways: Income tax relief for farming

Sideways loss relief: Income tax relief in respect of farming losses can be claimed against other income but only if the farming business has been profitable in at least one of the five years preceding the claim.

If you are carrying on a farming business but receive income from another source you may be able to use losses incurred in the farming business to relieve income tax on your other source of income.

This well known relief found in S380 Income and Corporation Taxes Act 1988 (ICTA), is known as sideways loss relief (SLR). This provides that any person who sustains a loss in any trade carried on by him either solely or in partnership, may make a claim for relief from income tax on an amount of his income equal to the amount of the loss by giving notice within two years after the year of assessment.

The case of Michael Howes v HMRC [2012] UKFTT 179 (TC) (Howes v HMRC) reminds us that for SLR to be available, the farming business must have been profitable during at least one of the five years preceding the claim.

Howes v HMRC

Mr Howes who was new to deer farming, set up Buckholt Park Limited in the 1990’s as the vehicle for his deer farming business. He continued to work as a surveyor whilst he got the deer farm up and running. He intended to give up his work as a surveyor once Buckholt Park Limited became profitable. Unfortunately this did not happen and the 40 hinds Mr Howes’ initially purchased were largely given away to a zoo. Small sums were recouped by farm gate sales of small joints of meat to friends, but the business never made a profit.

HMRC rejected Mr Howes’ claim to use his farming losses to relieve the charge to income tax on his income as a surveyor and Mr Howes appealed. On 7 March the First Tier Tax Tribunal confirmed that for SLR to be available it was necessary for the farming business to have been profitable in at least one of the five years which preceded the claim. As Buckholt Park Limited had never been profitable SLR could not be used against Mr Howes’ income as a surveyor.

Farming for lifestyle or recreational purposes

Mr Howes’ claim was caught by S397 ICTA which Parliament enacted to prevent taxpayers who had taken up farming for recreation rather than genuinely commercial reasons from offsetting their losses against non-farming income. S397 ICTA restricts relief where tax adjusted losses (before capital allowances) were incurred by a company carrying on a trade of farming or market gardening in each of the five previous years of assessment (or a longer period if applicable). There is an exception in S397(3) which is intended to protect genuine commercial start ups from the operation of s397. The s397(3) exception applies to businesses run by a competent farmer, which could not reasonably be expected to become profitable within this period, but would become profitable after the end of the next year following the period of loss. Mr Howes told the Tribunal it would take between three and four years for a deer farm to generate income so the s397(3) exception was not applicable in his case. In any event once the herd was disbanded there was no prospect of Mr Howes deer farm making a profit.

SLR from 2013

From 6 April 2013 the Government proposes to put a cap on unrestricted income tax reliefs claimed by individuals. The cap will be set at the greater of 25% of income, or £50,000 in any one tax year. As there is currently no cap on SLR this may be affected. There will be no definite position on this until the Government concludes its consultation.