Losses are not forever

A recent tax case heard before the Upper Tribunal has confirmed that sideways loss relief cannot be claimed by farmers in the sixth year of loss making, even for commercial trades carried out full time. This ruling reinforces legislation often referred to as the “hobby farming” rules.

Sideways loss relief is useful to taxpayers who have other sources of income, for example, employment earnings or investment income, as losses from a trade can be offset against this income, thus reducing taxable income and tax liabilities.

The tax case of Scambler & Scambler v HMRC [2017] UKUT 001 concerned dairy farmers who had made losses in six consecutive years due to the low price of milk. The volatility of milk prices was not sufficient to demonstrate a specific reason why profits could not be expected in the loss period.

The ruling confirms that sideways loss relief cannot be claimed for more than five years unless the taxpayer can demonstrate that there could be no reasonable expectation from the outset of profits until after a period beyond five years because of the commercial nature of the trade. Projecting more than five years ahead may be difficult, if not impossible, to do!

So if your farming business has suffered several years of sustained losses, consider what measures can be taken to return to profitability, such as delaying discretionary expenditure or holding stocks for a shorter time before selling. These measures could protect your ability to claim losses for a longer period.

For more information, speak to one of our EQ Agriculture team today.