The normal basis for livestock valuation is the lower of cost or net realizable value.
For animals purchased, cost is the original purchase cost plus the cost of meal and forage consumed by the animal since they arrived on the farm.
For homebred animals, Revenue & Customs and the Farmers’ Union, have agreed that the cost price of a homebred animal may be calculated as follows: cattle : 60% of market value; sheep and pigs: 75% of market value.
A farmer who has a production herd of dairy cows, suckler cows, sows or a flock of breeding ewes or fish breeding may elect for the ‘herd basis’. The herd basis provides a set of rules whereby a herd or flock of production animals is excluded from trading stock and treated like a capital asset. There are a number of benefits to the farmer of being in the Herd Basis: the cost of feeding and keeping the herd or flock is an allowable expense for tax; the profit on the eventual disposal of the herd or flock is tax free provided the herd or flock is not replaced within five years and annual increases/decreases in the values of breeding animals are ignored, when calculating annual profits.
Only mature animals can be in the Herd Basis: female animals when they have their first offspring; male animals when they are first used for breeding. Animals which are excluded from the Herd Basis include animals which are kept primarily for fattening or slaughter and a ‘flying herd’ or ‘fly flock’, where animals are continually being purchased or sold, so that they do not generally remain in the herd or flock for a normal productive life.
Any farmer who keeps a production herd or flock can elect for the Herd Basis. A farmer may be a sole trader, partnership or limited company.
An election for the herd basis must be made in writing to Revenue & Customs; must specify the type of herd or flock and is irrevocable. The election must be made within specified time limits: for sole traders and partnerships it is twelve months after the fixed filing date for the first year assessment, after the year of commencement; in the case of a company it is two years from the end of the first accounting period during which a production herd was maintained. Where all or substantially all of a production herd is compulsory slaughtered the above time limits do not apply.
There are additional herd or flock records to be kept in respect of the production animals in the herd basis. A record is required of the number of animals having their first offspring and of the number of breeding animals which are culled.
In a time of changing stock values, it is important to have a consistent basis of stock valuation in order to ensure that annual accounts reflect, as far as possible, the true trading result for a particular year.
Inconsistent methods of valuing stocks will result in distorted annual results which will impact on tax liabilities and the confidence of the farm’s bankers. In a period, where there is a trend of increased values of production animals, coupled with the risk of compulsory slaughter, an election for the Herd Basis may be prudent.
For further information, ring (028) 82241515.