Farm tax loss relief cannot be claimed indefinitely

 In Tax

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The Upper Tribunal decision in B and R Scrambler v CRC Tribunal (Tax and Chancery Chamber) 10 January 2017 highlighted the harsh approach of HMRC towards the allowability of continued loss claims by farmers. While many of the diversified farm enterprises are producing overall profits, the pure farming element has seen reduced profitability.

The judge made it very clear that the farm tax loss relief could not be claimed ‘indefinitely’. The provisions of s 67 and s 68 have been in place a considerable number of decades and are there to prevent ‘indefinite’ loss claims and the ‘hobby farmer’. At a general level farmers have seen pressures on the ability to achieve profit perhaps even more so when subsidies cease or reduce.

Farmers do enjoy farming. Other income streams might allow farmers to carry on farming at uncommercial levels. Many farmers have had no choice but to endure low farm profitability and survive on the sale of development land (see Henderson v HMRC TC04730) and/or letting income or some form of diversified income.

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The denial of the sideways tax loss relief by the Upper Tribunal in Scrambler highlights the need for a review as to the protection of tax loss claims. All farm accounts should be forensically analysed to understand the detail of the operation and link to business plans. With diversification, lettings and pure farming operations running side by side, there must be an evidenced understanding of costings and the correct allocation of overheads. There must be evidence to show how tax losses can be made ‘definite’ not ‘indefinite’ through contemporaneous evidence and business plans to show there is reasonable expectation of profit. This test has featured in several First-Tier tax tribunals.

In practical terms many farmers who were born on farms just understand farming and not the commercial drivers. The role of the farm tax adviser is to help monitor and protect tax losses.

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