Farm losses and tax credits

Farm losses and tax credits

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Our client has incurred farming losses but has other sources of income against which these losses are usually offset. No loss offset is available for income tax purposes this year as farm losses have been incurred for the last 5 years giving a tax liability. Can the farm loss still be claimed for tax credit purposes? The WTC guidance suggests that only losses can be claimed if arising from a trade carried on a commercial basis. Except for the "five year rule" the loss would have been claimed against other income. Without the loss for WTC purposes our client is facing a clawback of overpaid tax credits. Can anyone clarify the position?

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By nogammonsinanundoubledgame
11th Feb 2011 16:40

My take, for what it is worth

I have not experienced this particular problem in the field (odd how most farmers manage to make a profit every fifth year, isn't it?).  So with that in mind, my opinion is that you can (indeed must) sideways relieve the farming loss for TC purposes provided that you satisfy the commerciality test.

You will I think be aware that the commerciality test is required to be satisfied for any sideways loss relief for Income Tax.  The fact that farmers have an additional restriction when there are 5 consecutive years of loss contains a tacit implication that it is possible to satisfy the commerciality test and yet make 6 years' continuous trading losses.  If that possibility did not exist then the statutory restriction on the 6th year would be otiose, as relief would already be barred under the commerciality test.

Farming losses generated in the 6th year can still be carried forward for IT purposes, so relief is not necessarily lost altogether.  Even if not time barred by the 5 year rule, you always could carry the losses forward for IT purposes if you wanted to, and yet they would still be automatically sideways relieved for TC purposes.

Regulations 3 and 6 of SI2002/2006 refer to the commerciality test for TC purposes but make no reference to the 5 year rule, which they could have inserted had they been minded to do so (as indeed they explicitly linked the rules to income tax relief in the case of property income losses - reg 11(3)).  The sideways relief is not identical anyway between the two regimes, as under TC rules it is also set against spouse's income.

If it is a fully operational working farm and the farmers do not have independent means, then I would not expect you to run into a problem on the commerciality test.

I would not even expect this to be flagged up for audit: They are at last getting around to checking the TC declarations with tax returns, but even in your case the loss will have been reported on the tax return, albeit carried forward.

With kind regards

Clint Westwood

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By mwngiol
11th Feb 2011 16:51

Slightly seperate from the question

Just remember that the 5 year rule relates to losses before capital allowances, so if you have pre-CA profits but CA's which create a loss then loss relief is still available in full. You're probably fully aware of this but I have encountered quite a few errors with this when taking over clients from other accountants.

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By jloboyle
11th Feb 2011 16:58

@ Clint

Thank you for your comments. They are much appreciated.

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By GreenFarmer
12th Jul 2017 16:10

Also dealing with a farmer who has made losses for 2 years and is claiming WTC. He makes a profit from a property rental. He has previously been using sideways loss relief with the property profit. Previously WTC said on the phone that this was ok. However this year the advisor said it was not. Nothing that we are aware of has changed in the rules. Can anyone enlighten us on this pls?

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