Beef and dairy farmers whose cattle are slaughtered due to TB could face substantial tax bills. Last year, almost 33,000 cattle were compulsorily slaughtered, with some farmers losing a large proportion of their herd in one fell swoop.
Aside from the emotional and financial stresses involved, losing large numbers of animals can also result in a steep hike in tax. The problem occurs when the compensation for those cattle is paid, as it could fall into a different financial year to the purchase of replacement animals. If animals are held in a producer’s accounts as trading stock rather than on the herd basis, the compensation can lead to an abnormal profit, potentially turning into a large tax liability.
Where more than 20% of a ‘production herd’ is slaughtered due to disease, farmers running their accounts on the herd basis only have to bring compensation receipts into the accounts when the corresponding replacement animals join the herd. This has considerable tax advantages over the alternative trading system.
Fortunately for farmers who hold animals as trading stock, they can retrospectively change their accounts to the herd basis from the beginning of the year in which the compensation is due, where more than 20% of a herd is slaughtered. This is potentially very useful for those not already on the herd basis who might be affected.
Producers who prefer not to change to the herd basis can make use of an extra statutory concession to spread profits from the year of slaughter over the next three tax years to help manage their tax liability.
There are many pros and cons about the different structure of farm accounts. One of the downsides of the herd basis is that if the compensation paid is less than the value of the animal, the producer cannot offset that loss against tax – which they would be able to under the trading basis.
However, if profits are made when more than 20% of the herd is sold or slaughtered at any one time, the uplift in value is generally tax-free. As a rule, most farmers would prefer to opt into the herd basis, but can only do so under certain circumstances, such as adding or losing a partner.
If you are unlucky enough to lose a large proportion of your herd to TB, it could be an opportune time to make the switch to the herd basis, if that is a suitable option for your business.
• Andrew Vickery is head of rural services at accountants Old Mill. He may be contacted on 01392 214635.