HMRC have legislation in place to prevent farm losses being relieved against other income for ‘hobby farmers’ and so it is important to ensure farming is carried out on a commercial basis at all times. 

The main points to note are:

  • After 5 years of tax losses a profit must be made to demonstrate that your business is commercial.
  • If a loss is made in the 6th consecutive year you may not relieve the losses against other income.
  • These rules do not apply if a farmer can prove that he experienced extreme circumstances such as foot and mouth but otherwise would have made a profit.
  • For new farming businesses the loss in the year of commencement is not included.
  • If a profit is made in the 6th year the clock restarts, but it is important not to manipulate profits.

HMRC are looking closely at the commerciality of small farming operations, particularly if there is other income to utilise farming losses.