Rebecca Cave argues that restriction on loss relief for farmers is out of date and needs reform.
Farming is more than a business; it’s a life, and sometimes a very tough one. Costs and revenues are often determined by factors out of the farmer’s control; such as the weather conditions and world commodity prices, so farming losses are unpredictable. But the tax law (ITA 2007, s 67) requires the farmer to make a profit at least every six years, or those losses can’t be used in a sideways loss relief claim. Those farming losses aren’t extinguished, but are carried forward to be set against the next profit arising from the same farming trade – if it survives.
Sideways loss relief involves setting the trade losses against the farmer’s other income or gains in the year the loss arises or in the previous year. This will generally produce a repayment of tax paid in respect of the other income or gain. Such a tax repayment can make the difference between survival and bankruptcy for the farmer.
Once a farmer has made a loss in five straight years, there is pressure to make a profit in the sixth year to break the loss cycle and retain the sideways loss relief. If the farmer doesn’t claim sideways loss relief in the sixth year, (simply carries those losses forward), that is not sufficient to break the pattern of losses. This was shown in William Donaldson v HMRC TC04479 who was denied sideways loss relief for seventh and subsequent years of loss.
There is a get-out clause for the block on sideways loss relief set out in ITA 2007 section 68. This applies a two part test which envisages a competent person carrying on the same activities as the taxpayer did in:
a) current year (i.e. the sixth successive year in which a loss was made)
b) the beginning of the loss period (i.e. the beginning of the year which falls five years before the “current year”)
If the competent person at point b) could not have reasonably been expected to make a profit by the end of the current year, and at point a) the same person should be expected to make a profit in the future (at an undetermined date), then the losses for the current year should be given sideways relief.
The test in section 68 is hard to interpret correctly, which leaves farmers feeling that HMRC has made the wrong decision, as illustrated in these recent farming loss cases:
- Christopher French & Margaret French TC04053 - taxpayer won
- Neil Erridge UKFTT 89 TC 04294 - taxpayer lost
- William Donaldson v HMRC TC04479 - taxpayer lost, as explained above
- Peter Silvester v HMRC TC04682 - taxpayer lost
- Bryan & Rebecca Scambler TC04852 - taxpayer lost
Andrew Gotch, who represented Mr and Mrs Scrambler, commented; “HMRC take advantage of the interpretative difficulties presented by the test in section 68 to deny relief in cases where it should pretty plainly be allowed”.
The block on loss relief in ITA 2007, section 67 was original drafted to deny relief to “hobby farmers”, i.e. people who operate a minor farming venture which is not a serious commercial enterprise. However, in all of the above cases the taxpayer was operating a commercial farm. It seems that HMRC is not looking at the spirit of the law when denying loss relief, and instead wrongly applies a strained interpretation of section 68 in order to extract the maximum amount of tax from hard-working farmers.
Although Mr and Mrs Scambler lost their case the judge clearly had considerable sympathy for their plight. She said: “They fall into a category of farmer which was probably not envisaged at all when this legislation was first introduced in 1967; farmers whose profitability is dependent on a global, or at least European-wide market in commodities which significantly influences their business but over which they have no, or very little control.”
Gotch commented: “In fact there are good grounds for thinking that Parliament drafted law in s 68 that is easily capable of embracing those circumstances and preserving sideways loss relief for farmers who are doing everything right, but who are undone by market forces over which they have no control. Why HMRC do not accept an interpretation of the law that demonstrates Parliament’s desire to support struggling commercial farmers is a mystery that the Tax Tribunals are taking a long time to solve.”
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.