Ways to utilise a tax loss in the farm business

editorial image

Where a farm business is trading as a sole trader or partnership and makes a trading loss, there are many options available to optimize the benefit from the loss.

The trading loss, after claiming capital allowances, may be set off against any other taxable income which the sole trader or partner has in the same year as the loss was incurred.

This sideways transfer of the loss will result in a reduction in tax payable on the other income or a tax refund, if tax has already been deducted or paid on the other income. Another option is for the loss to be carried back to the previous year and if tax was paid in that year, a tax refund will result. A trading loss in the year in which a son/daughter becomes head of holding may be carried back for up to three years to the extent that the loss is allocated to the young person, and set-off against his/her other income, if any, thereby getting a tax refund.

Where in consultation with the farm’s accountant, it is considered that none of the above options are appropriate, then the loss may be carried forward and set-off against future trading profits from the farm. For the purpose of farmers averaging and Tax Credits a loss is considered zero.

In order to avail of tax relief from a farm loss, the farmer must demonstrate that the farm is operating on a commercial basis with the objective of making a trading profit. When there have been five successive tax years in which losses have been made, sideways loss relief claims for the next years will not be permissible. There have been many Tax Tribunal cases in relation to the claiming of the tax relief on farm losses. The key principles from these cases are that it is not possible to use extenuating factors such as commodity prices to argue that farming is not profitable in the long term; for a loss claim to be successful it is necessary to provide detailed current information and business plan to show why profits have not been achieved and the timescale in which it is projected that profits will be achieved; it is only in very exceptional circumstances that a farmer will be able to claim losses for more than five consecutive tax years.

Tax losses which arise from a commercially run farm business have the potential to generate a tax refund, but strong evidence is required to prove that the business is operated as a commercial enterprise. There are many restrictions in preparing the loss relief claim and consultation with the accountant is necessary.

For further information, telephone (028) 82241515.