Farming: At a glance

What is farming? What are the tax consequences and tax considerations of farming? What expenses can farmers claim for tax purposes? Are there special tax and accounting rules for farmers? What are the VAT rules for farmers? What are the tax consequences of diversification? 

Subscribers see Farming: Tax Overview for your detailed version of this guide.

This is a freeview 'At a glance' guide to farming businesses. 

What is farming?

Farming means the occupation of land wholly or mainly for the purposes of husbandry but does not include Market gardening.

• There is no statutory definition of husbandry. It is generally taken to involve activities that include the growing of crops and the raising of farm livestock. 
• For examples of what does and does not constitute farming, see Farming: Tax Overview

Income Tax trading losses

• Sideways loss relief is not available after five years of losses unless the 'reasonable expectation of profit' test is met. This rule is specific to farming trades. See Losses (sideways): Restriction for uncommercial trades.
• Rental business losses arising as a result of agricultural expenses may be subject to enhanced loss relief rules. See Farming: Tax Overview

Special computational rules for farmers 

Farming businesses are subject to a number of special computational rules. These include: 

• Farmers' Averaging relief
  • Profits may be averaged to prevent farmers from suffering high effective rates of Income Tax due to fluctuations in their trading profits.
• Stock valuation
  • The valuation of stock can be difficult for farmers and it is often not possible to work out actual costs attributable to stock. Deemed cost valuations may be used for some stock. 
• Accounting for stock: herd basis
  • Where animals are held for the products or offspring they produce, their economic nature is more akin to being capital assets. The herd basis allows for such production animals to be treated as capital assets. 
    • The cost of maintaining the herd is an allowable deduction when calculating trading profits.
    • The profit on a substantial disposal of the herd is tax-free.

Inheritance Tax reliefs

• Agricultural Property Relief (APR) may be available in respect of land which has been occupied for the purposes of agriculture.
  • APR is only available on the agricultural value of land and property.
  • Detailed conditions determine whether APR is available at 50% or 100%. 
  • Certain shareholdings in unquoted farming companies can qualify for APR.  
  • Land which is let to a third party can qualify for APR if conditions are met.  
  • Farmhouses may qualify for APR if they are used in connection with agricultural land or pasture and are of a character appropriate to such agricultural land or pasture 
• Business Property Relief (BPR) may also be available in respect of a farming business, where conditions are met.
  • This can be a very important relief to obtain where agricultural property has hope value.
  • Relief may be restricted where the farming trade is carried on by a partnership, but the farming assets are owned personally. 
  • Care needs to be taken where businesses diversify; this may prevent BPR being available. 

Farmhouses 

• A proportion of the running expenses of the farmhouse can be deducted from trading profits to reflect its use as the centre of business operations on the farm.
• The tax position of the farmhouse must be considered carefully in respect of: 
  • Private Residence Relief (PRR) and exclusive business use. 
  • Agricultural Property Relief and the 'character appropriate' test. 
  • VAT recovery. There are Farming-specific agreements for the amount of VAT which can be recovered on repairs, maintenance, extensions and improvements. 

See Farming: Tax Overview

Farm worker’s cottages

• VAT can be recovered on expenses relating to farm worker’s cottages where Certain conditions are met. 

Farming and grants

• Farming businesses are often able to claim grants and subsidies from governmental and non-governmental bodies.
• How grants should be accounted for and taxed depends on their nature. See Farming: Tax Overview for details on the treatment of grants. 

Diversification

Many farmers look to generate additional income from their assets through diversification. This can have a significant tax impact for IHT (affecting APR and BPR), Income Tax, Capital Gains Tax (CGT) and VAT.  

See Farming: Tax Overview for a discussion of the tax consequences of different forms of diversification, including: 

• Alternative crops
• Letting of land, including different forms of agricultural tenancies
• Livery and stabling
• Wind or solar farms
• Anaerobic digesters
• Rewilding
• Agri-environment schemes
• Woodlands

What expenses can farmers claim? 

For a detailed list of expenses that farmers can claim, see Farming: Tax Overview

Capital expenditure

Farms often incur significant capital expenditure. Much of this will be on plant and machinery where it is relatively simple to identify the allowances which are available. 

Other forms of farming capital expenditure need detailed consideration. These often involve land and buildings. Examples include: 

• Slurry pits.
• Silage clamps.
• Silos for temporary storage.
• Storage tanks.
• Cold stores.
• Glass houses. 

For some assets, there are special rules which apply only to farming trades. See Farming: Capital allowances

Case law

For the latest farming case law, see Farming: Tax Overview

VAT

While most farming activities will be zero-rated, as farms diversify it is not unusual to see standard-rated and exempt supplies also being made. 

• For a detailed discussion of typical supplies made by farmers, maximising VAT claims, VAT case law and business splitting, see Farming: Tax Overview. 
• A special Agricultural Flat Rate Scheme is available for farmers as an alternative to VAT registration. 

Useful guides on this topic

Farming: Tax Overview
What is farming? What are the tax consequences and tax considerations of farming? What are the features of agricultural tenancies? What expenses can farmers claim for tax purposes? Are there special tax and accounting rules for farmers? What are the VAT rules for farmers?

Farming: Capital allowances
What types of expenditure may qualify for capital allowances in farming businesses? What farming-specific points need to be considered?

Averaging claims
When can profits be averaged? What trades do averaging apply to? How are averaging adjustments calculated and made?

Herd basis: Farming
The 'herd basis' recognises, for tax purposes, the economic nature of animals held for production as capital assets, rather than as trading stock. This can be of benefit to some farmers and result in tax savings.

IHT Agricultural Property Relief
What is Agricultural Property Relief (APR)? When does it apply? What are the conditions and restrictions of the relief?

Flat rate scheme: Farmers
What is the agricultural flat rate scheme? Who can use it? What are the conditions? What is the benefit? What about non-farming income? 

Losses (sideways): Restriction for uncommercial trades
What is sideways loss relief? What restrictions apply? When do they apply? What is an uncommercial trade?

Market Gardening: Tax Overview
What is market gardening? What are the tax consequences?  

Woodlands: Overview
Woodlands and forestry ownership carry significant tax reliefs, including Income Tax, Capital Gains Tax (CGT) and Inheritance Tax (IHT). This is a guide to those reliefs.