9 November 2015    |    Taxation

Years of farming losses disallowed

Years of successive losses disqualified farmer from loss relief

The First-tier Tax Tribunal has refused to allow trading tax relief on the losses of a farmer’s sheep-breeding business, because it had made a loss in several successive years and so had no ‘reasonable expectation of profit’ as required by s68 of the Income Tax Act 2007. Peter Silvester unsuccessfully claimed that s68 did not apply to him because its heading referred to ‘hobby farming’, which he was not engaged in, and because his business is now profitable (Silvester v HMRC, 2015 UKFTT 532 TC).

The judgement turned on the key argument:

The issue in relation to both assessments is whether section 67 ITA applies to prevent Mr Silvester from claiming a deduction for his farming losses against his general income.  Section 67 provides that relief for a loss made in farming is not available if a loss, calculated without regard to capital allowances, was made in the trade in each of the previous five tax years.  Section 67 does not apply, however, where the farming activities meet the ‘reasonable expectation of profit’ test in section 68.  In making the assessments, HMRC took the view that, as Mr Silvester’s farming trade had made losses in each year since 2000-01, section 67 applied and trade loss relief was not available against Mr Silvester’s general income for the farming losses in 2008-09 and 2009-10.  Mr Silvester contends that, as the heading to section 67 refers to ‘hobby’ farming and he is not a hobby farmer, the section does not apply to him and, even if it does, his farming activities pass the reasonable expectation of profit test in section 68.

Mr Silvester argued that he was not farming as a ‘hobby’ but was genuinely running a business; albeit one that made a recurring loss.

The tax tribunal decided that even although Mr Silvester may have been trying to make a profit every year, the fact that he made a loss for five years in a row was sufficient for HMRC to make a determination that he was undertaking a ‘hobby’ trade without ‘reasonable expectation of profit’ and as a result the losses could not be offset, and that this could be backdated resulting in previous repayments having to be repaid by the taxpayer.

This has a potential major impact on crofters in the Highlands and Islands who have been making losses since the change in the subsidy regime, or potentially since the restrictions on crofting since 1986.

Crofters are advised to be aware that whilst they may make tax refund claims for crofting losses in good faith, it is possible that HMRC may seek to disallow these losses and backdate that claim as far as they can go.

For further information about the potential impact on your crofting activities, please contact Angus at an early date.




The information provided is for general information purposes only.

Legislation and details may have changed since this was written.  The text may not include all matters that are relevant to your individual situation.

You should not make decisions, or refrain from making decisions, without taking further professional advice about your specific circumstances.

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