Owner-Managed Businesses

Trade or hobby

Produced by Tolley
  • 21 Mar 2022 07:25

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

  • Trade or hobby
  • Interaction of hobby farming rules and commerciality
  • Restriction to relief under ITA 2007, s 64
  • Restriction to relief under ITA 2007, s 72
  • Hobby farming
  • Diversification and hobby farming
  • Farming losses ― test of commerciality
  • How to prevent a real farmer being classified as a hobby farmer
  • Tests
  • Anti-avoidance through cessation
  • More...

Trade or hobby

Interaction of hobby farming rules and commerciality

Farming has its own set of ‘hobby farming rules’, which historically have stated that a profit must be made every six years. This is known as ‘the five-year rule’, in that there can be five years of losses but there must be a profit in the sixth year. However, HMRC is currently taking a very close look at all loss claims and the reasons behind them.

The hobby farming rules were introduced in the 1960s due to concerns over taxpayers farming for recreational purposes and not for commercial reasons. The original intention was to restrict loss relief in ‘extreme cases’ where the trading activities bore no relationship to the criteria of a commercial trade. The so-called ‘five-year rule’ was introduced as an extension to the original rules. It acted as a further test to show that the business is capable of making a profit.

There are provisions to prevent the formation of a company or a change of partnership being falsely used to break the five-year rule. In the latter case, husband and wife are treated as the same person.

BIM85620 states the position is as follows with regards to ITA 2007, s 67:

‘The five-year rule only applies to trading losses arising from farming or market gardening activities. The rule denies trade loss relief against general income etc (see BIM85605) where a loss computed without regard to capital allowances was incurred in each of the five tax years of assessment preceding that in

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