662 Income tax: restriction of relief for losses in farming or market gardening

Summary

A loss incurred in farming or market gardening may not be allowed against other profits unless the claimant can show that the farming or market gardening was being carried on on a commercial basis and with a view to profit. In addition to, and independently of, this test, loss relief is not allowed if losses have been incurred in each of the 3 preceding years.

Details

Definitions

(1) “prior 3 years” means the 3 years before the year of loss.

“prior period of loss” means the prior 3 years or a longer period if losses were incurred in successive years over a greater period.

Treatment of losses

(2)(a) A farming or market gardening loss does not qualify for loss relief unless it is shown that, for the year in which the loss was incurred, the farming or market gardening was being engaged in on a commercial basis and with a view to being profitable.

(2)(b) Any farming or market gardening loss does not qualify for loss relief if a loss was also incurred in each of the prior 3 years.

(2)(c) Where, exceptionally, the farmer or market gardener can point to activities which could reasonably be expected to produce a profit but might, nevertheless, find it difficult to maintain that the conditions in subsection (2)(a) were satisfied, it will be accepted that the trade was being carried on with a view to being profitable.

(2)(d) Relief may exceptionally be continued even where losses had been incurred for 3 years or more. This is designed to meet the genuine case of the farmer or market gardener who sets out on an undertaking realising that losses will be incurred for a substantial initial period but with a justifiable expectation of building up a profitable operation in the long run (for example, a farmer trying to regenerate marginal land over a long period).

(2)(e) The restriction on loss relief does not apply if the loss-making farm or market garden is part of and ancillary to a larger trading undertaking.

(3) The rules of Schedule D, Case I, apply to establish if a loss has arisen in any tax year.

(4) Where a trade of farming or market gardening is carried on for only part of a year, because the trade may have been commenced or discontinued within that year, the 3 year rule operates in relation to the trade for that part of that year.

Trade commenced within 3 years preceding the year of claim

(5) The loss relief restriction does not apply where the trade was commenced in the 3 years preceding the year of claim. If any event is treated under the Income Tax Acts as equivalent to a discontinuance and setting up of a trade (for example, the sale of a farm by one person to another), the purchaser is treated as having commenced to trade on that date.

Anti-avoidance

(6) As an anti-avoidance measure to counter attempts to secure more than one run of 3 years, where a trade of farming or market gardening changes hands, the relieving provision of subsection (5) does not apply if the persons carrying on the trade immediately before and immediately after the change are connected.

Relevant Date: Finance Act 2021