Sideways Loss Relief

Posted On March 20, 2017 By mhauk

A challenge in the agriculture sector has always been fluctuating profits with reasons including the weather or other challenges such as movement restrictions as a result of foot and mouth. Farmers who make losses are able to relieve those losses against other income, called sideways loss relief.  However, HMRC will not permit indefinite relief of losses in this way and consider a fixed number of consecutive years for which losses can be relieved, with 5 years being the period set out in the legislation.

Usually, this will relate to a new business, however, these rules could also apply to a more established business, if a new activity is commenced.

We have seen an increase in HMRC enquiries into sideways loss relief, seeking to prevent or restrict the relief and thus increase the amount of tax due. However, even where there is income from other sources, preventing sideways loss relief can result in significant cashflow challenges.

Unfortunately, HMRC will not allow a defence of exceptional circumstances or bad luck to extend the permitted period and we have seen reasons such as foot and mouth and major fire be excluded from the consideration of why losses for a longer period than 5 years should be allowed.

We are aware of cases where the default period of 5 years has been extended, but the chances of success are greater the more prepared you are.

The test for HMRC is the period in which a competent farmer would expect to make a profit from the activity. The activity, or your specific circumstances, may be more challenging but it is not sufficient to say that events happened along the way. Therefore, before establishing any new agriculture related activity on the farm, it is sensible to prepare a business plan and projections for the activity, which sets out the rationale for the activity, the challenges that will be faced and the actions required. The projections should cover the period until the activity is expected to be profitable.

Activities that may face particular challenges as new activities include livery and specialist crops such as vineyards. The preparation of a business plan in advance or early in the activity provides important evidence for HMRC as to the period of time for which losses were expected. Any discoveries in terms of conditions existing at the outset of the activity should then be documented and the plan updated.

However, the planning will not prevent an enquiry into your tax affairs. There are companies who offer tax fee insurance which, for a small fee per year, will pay for the professional fees required to undertake the work required to defend an enquiry. This can reduce the stress and the time commitment by enabling you to engage your advisors to apply their knowledge and undertake more of the work preparing the documentation required and leave you to continue to focus on your business. As tax enquiries can cost thousands in professional fees and take many months to be resolved, the small upfront investment in advance can provide peace of mind should HMRC challenge your position.

If you would like to discuss diversifying your business and/or tax planning across your activities, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Agriculture team.

This article originally appeared on the blog of our member firm, Broomfield & Alexander