Production animals and the herd basis

May 3rd 2023

You keep various animals for a new fresh produce business. But you may be unaware that there are options as to how the animals are treated for tax purposes.   Elaine Wight from our Accounts Deptartment in Hawick looks at the options.

By default, farm animals are treated as trading stock. However, some animals are not kept for resale but for production purposes, e.g. chickens for eggs, sheep for lambs and so on.

In reality, these animals are more akin to capital assets than trading stock, and so it is possible to make a special election for them to be dealt with under the ‘herd basis’. If made, the animals are not treated as trading stock.

Whilst primarily used by farmers, the herd basis can be used by anyone who keeps animals for production purposes for any trade.

Herd basis
If an election is made, a number of rules apply to the animals covered when calculating profits:
• The initial cost of the herd isn’t an allowable deduction, nor is that of any subsequent increase in herd size.
• The net cost of replacing animals in the herd (but not any element of improvement) is an allowable deduction.
• Where the odd animal (amounting to less than 20% of the herd) is sold from the herd and not replaced, the resulting profit or loss is taken into account in arriving at the farming profits.
• Where the whole herd, or a substantial part (20% or more), is sold and not replaced, the resulting profit or loss isn’t taken into account.

Once made, an election cannot be revoked, and applies to the class of animals it covers for however long they are kept. You must make the election no later than the statutory time limit. For a sole trader, this is the first anniversary of the normal self-assessment filing date for the tax year they keep a production herd of the specified class; so for 2023/24 it would be 31 January 2026.

Please note that if an election is made, the trader cannot report profits on the cash basis, so it’s important to assess the impact of this.

Making an election
There’s no set format for making an election, however it:
• Must be made in writing.
• Must specify the class of herds to which it relates.
• Normally takes effect from when the farmer first starts keeping a production herd of the specified class.

Once made, the herd basis will apply to all animals of the same class. A separate election is required for different classes of animal.

It is possible that an election can be deemed to have been made by using it in the accounts, but we recommend making a written election.

This will need to specify the class of animals to which the election applies, and then be sent to your usual HMRC office.

You can make an irrevocable election for the animals to be treated like capital assets rather than trading stock. This excludes any profits made on their sale from being taxed as trading income. It is best to make a written election to opt for the herd basis for each class of animal that you keep if you want to choose this option.

For further supoort and enquiries please feel free to contact our team at JRW.

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