Tax averaging for farmers
By Heather Bright, Partner and ARA specialist
One aspect of taxation that can significantly impact farmer’s financial planning is tax averaging.
Tax averaging allows farmers to even out fluctuations in their income over consecutive years, which can be particularly useful in an industry where income can be highly variable. This process can lead to a reduction in the overall tax liability by averaging the profits over two or five years, depending on your eligibility and choice.
Eligibility for tax averaging
To be eligible for tax averaging, you must be a sole trader or a partner in a farming business in the UK. The scheme is not available to companies or corporate entities. Additionally, your business must involve the cultivation of land or the rearing of livestock, including fish farming.
How tax averaging works
Tax averaging works by calculating the average profit over two or five years and then recalculating the tax for each year based on this average profit. You can choose between two-year and five-year averaging, depending on which suits your circumstances best. The two-year option is more straightforward, averaging the profits of two consecutive years, while the five-year option averages the profits over five years, but with more complex calculations and restrictions.
Benefits of tax averaging
In years where you have a higher profit, tax averaging can reduce your overall tax bill by spreading the profit over multiple years.
By smoothing out the peaks and troughs in your income, tax averaging can help you plan your finances more effectively.
Additionally, the choice between two-year and five-year averaging provides flexibility to suit different business needs and income patterns.
Maintaining accurate and detailed records is crucial. You should keep records of all your farming income and expenses, as these will be necessary for calculating your average profit.
How to apply
To apply for tax averaging, you need to include the calculation in your Self-Assessment tax return.
To ensure that the calculations are done correctly and that you are making the most of the scheme, please contact our tax experts today.