The past two years have been among the most challenging in recent memory for many farming and rural businesses.

Poor harvests, persistent wet weather, rising input costs driven by geopolitical instability and the continued unwinding of direct support payments from the Government have left a number of businesses recording losses for the first time and, in some cases, for the second or third year running.

When a loss occurs, attention naturally turns to the immediate cash position and whilst that is understandable and should not be ignored, it is only part of the picture.

The tax system provides a range of mechanisms that can offset losses against profits or other income and using them correctly can make a meaningful difference to the financial health of the business.

The main relief options for sole traders and partnerships

For farming businesses trading as sole traders or partnerships, the principal routes are as follows.

  • Sideways loss relief – This allows a trading loss to be set against other income in the same tax year or the preceding tax year. Where a farmer has employment income, rental income or other taxable sources alongside the farming trade, this can generate a repayment from HMRC relatively quickly. It is worth noting, however, that if farming losses have been recorded in each of the five preceding tax years, the so-called ‘hobby farming’ rules may restrict the ability to claim sideways relief. These rules are designed to prevent indefinite loss claims against other income, so early planning is important.
  • Carry back – This allows a loss that cannot be fully absorbed against current-year income to be carried back against income from the previous tax year, potentially recovering tax already paid as a cash repayment. This is often an attractive option where the prior year was profitable.
  • Carry forward – This is the most straightforward route, setting losses against future profits from the same trade. It offers no immediate cash benefit, but its value will depend on when the business returns to profit and the rate of tax that applies at that point.
  • Terminal loss relief – This is relevant where a farming business is ceasing trade. Losses arising in the final 12 months of trading can be carried back up to three years against profits from the same trade. This can provide a potentially significant level of relief where the business was profitable in the years leading up to its closure.
  • Capital losses – These arise where a capital asset, such as land, buildings or machinery, is disposed of at a loss. In most circumstances, these can be set against capital gains in the same tax year or carried forward against future gains.

The position for incorporated farming businesses

Companies have broadly comparable options, though the mechanics differ in some important respects.

A company can carry a trading loss back against total profits of the previous 12 months, carry it forward against future total profits or, where the company is part of a group structure, surrender it to other group members under group relief.

There is no direct equivalent of sideways loss relief for stand-alone companies.

One point that is easy to overlook is the timing of when a loss relief claim is made, as this affects when the cash benefit is received and the value of the relief.

Getting the detail right

The most important thing to understand is that a loss year does not simply mean a lower tax bill or no tax bill to pay.

The rules governing loss relief are considerably more complex than that, particularly where the business has multiple income streams, where the hobby farming provisions may apply or where losses span more than one tax year.

At Milsted Langdon, our specialist agriculture team has worked with farming and rural businesses across the South West for over 30 years.

We understand the pressures the sector is currently facing and can help you identify which relief is most appropriate to your circumstances, ensure claims are structured correctly and made at the right time and make sure that nothing is left on the table.

If you would like to discuss how loss relief may apply to your farming business, please get in touch with our agricultural team.