The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
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:
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
the cost of maintaining the herd can be charged against tax
any profit on its eventual disposal is tax free
an election to HMRC must be made, and is irrevocable
qualifying activities are either:
animals kept for the breeding and sale of their offspring, or
animals kept for the production and sale of products including milk, wool, eggs or honey
qualifying animals include cattle, sheep, thoroughbred racehorses, etc
immature animals, temporary herd members or those animals held for fattening and slaughter do not qualify
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.
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:
the initial cost of the herd, and any subsequent increase in size, is not an allowable deduction against tax
the net cost of replacing animals is an allowable deduction
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
when the whole herd or substantial part (20% or more of the herd ― BIM55525) is sold and not replaced, the resulting profit or loss is excluded from the farm
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