Herd basis

Produced by Tolley
Herd basis

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Herd basis
  • Overview
  • Operation of the herd basis ― summary main rules
  • Operation of the herd basis ― when an animal enters or leaves the herd
  • When an animal enters the herd
  • When an animal leaves the herd
  • Initial setting up of the herd
  • Additions follow
  • Home-bred or home-reared additions
  • Animals acquired by gift
  • More...

Overview

As a rule, farm animals are allocated to trading stock within the annual farm accounts. However, some such animals are kept primarily for the products they produce, or in breeding cases for their offspring, and are, to all intents and purposes, capital assets. UK tax law recognises this by giving the farmer the option of electing to use the herd basis.

Overview of key points:

  1. the production herd is excluded from trading stock, and thus the farm profit and loss account (farm P&L), and instead capitalised on the balance sheet

  2. the cost of maintaining the herd can be charged against tax

  3. any profit on its eventual disposal is tax free

  4. an election to HMRC must be made, and is irrevocable

  5. qualifying activities are either:

    BIM55570

    1. animals kept for the breeding and sale of their offspring, or

    2. animals kept for the production and sale of products including milk, wool, eggs or honey

  6. qualifying animals include cattle, sheep, thoroughbred racehorses, etc

  7. immature animals, temporary herd members or those animals held for fattening and slaughter do not qualify

  8. the election is not available to farmers who use the simplified cash basis, see the Eligibility for the simplified cash basis guidance note

See also Simon’s Taxes B5.150–B5.154.

Operation of the herd basis ― summary main rules

Where a herd basis election has been made, the production herd is governed by rules contained in ITTOIA 2005, Part 2, Chapter 8.

In summary, the main rules are as follows:

  1. 1)

    the initial cost of the herd, and any subsequent increase in size, is not an allowable deduction against tax

  2. 2)

    the net cost of replacing animals is an allowable deduction

  3. 3)

    when an individual animal, or insubstantial group, is sold from the herd, the profit or loss from this should be included in the farm profits or losses

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