Loss Relief Denied on Uncommercial Farming

The general rule in tax law is that for a trading loss to be set off against other income in order to reduce a tax liability, the trade which incurred the loss must have been carried on 'with a reasonable expectation of profit'.

Although the agricultural sector has 'averaging' provisions (liberalised in the 2015 Budget) which can ease the position where the results yo-yo, HM Revenue and Customs (HMRC) seem to be taking an increasingly tough stance on loss claims in the sector – especially those relating to 'hobby farming' activity.

A recent case illustrates the approach. It involved a loss-making equestrian breeder who set up a new trade growing asparagus. This led to a claim for losses to be set against other income of nearly £80,000.

HMRC refused the claim, arguing that the enterprise was not carried out on a commercial basis with a reasonable expectation of profits. The equestrian trade had lost money for several years and it was unlikely that the asparagus growing would turn a profit for at least three years.

The two parts of the business were not separately accounted for, so the First-tier Tribunal decided that there was one composite trade. Furthermore, in the absence of a credible business plan to support the contrary view, there was little possibility that the future profits from the asparagus growing could exceed the equestrian losses.

The claim to set off the loss against other income was therefore denied.

The practical point is that when losses are expected, it is important to show that there is a reasonable expectation of profit at some point in the foreseeable future. Failure to do so may leave losses only available for relief by carrying forward against future profits of the same trade. Also, where a profitable enterprise is 'mixed in' with an unprofitable one, care should be taken to ensure that this does not produce adverse tax consequences.