HMRC has published a 26 page consultation document detailing the extension of the averaging period to 5 years. The document put forward 2 options for how the proposed change could be implemented.
The Basics
- Will apply from 2016/17 therefore first extended period will be 2012/13 to 2016/17
- Will always be a period of 5 consecutive years – or max eligible years for new trades/partners
- Profits averaged evenly over the eligible period
Option A – Building on the Current Framework
- Annual claims still required
- 70% volatility test retained – between current year and average of previous 4 years
- Volatility test met automatically if trading loss incurred in any of the 5 years
- No marginal relief (70%-75%)
Option B – Developing a new Framework
- No requirement for a volatility test
- No annual claims
- Irrevocable opt in election for the next 5 years*
*Example: Farmer opts in to average 2016/17 with the previous 4 years. He must then average 2017/18 to 2020/21 with the previous 4 years. 2021/22 taxable profit not averaged unless a new 5 year opt in election is submitted.
The new proposals put forward by HMRC are definitely a welcome change for farmers, who’s profits can vary significantly from year to year due to external factors outside their control. Extending the averaging period from 2 to 5 years should further help to ensure that allowances are utilised, higher rates of tax minimised and tax liabilities reduced as a result.
Further information will be available when the final legislation is published following the consultation period.
