Farmers need to prepare year end stock valuations for the preparation of their financial accounts and this should include all livestock, growing crops and deadstocks.
For those farming clients who choose not to employ a land agent to provide the year end valuation, we have produced a handy guide to explain the basis of valuation in the farm accounts.
Valuation of Deadstock, Growing Crops, Crops in Store and Livestock
- Deadstocks are easy and include feed, seed, fertiliser, chemicals, fuel etc and the basis of valuation is bought in cost (excluding VAT).
- Growing crops represent the cost of crops in the ground at the balance sheet date and include seed, fertiliser, sprays, motor and labour costs. Whilst complicated, this is usually done on a per acre basis and handy guides such as the John Nix Farm Management pocketbook will help.
- Crops in store also need to be valued based on the cost of inputs. Again, as detailed cost records are seldom available, guides such as John Nix Farm Management can be used to estimate the values.
- The normal basis for livestock valuation is the lower of cost or net realisable value. For bought in animals, cost is the original purchase cost plus the cost of feed consumed since it arrived on the farm. However, for homebred animals, HMRC will accept that the cost price can be calculated as a percentage of market value being 60% for cattle and 75% for sheep and pigs.
Special Rules for Production Herds
A further complication arises if the farm has a production herd which might be dairy cows, suckler cows, sows or a flock of breeding ewes. If a herd basis election has been agreed with HMRC the herd or flock are excluded from trading stock and treated like a capital asset. A brief outline of this tax election for herd basis is as follows:
- The main benefits to the farmer of being on the “Herd Basis” are that the cost of feeding and keeping the herd or flock is an allowable expense for tax, and the profit on the eventual disposal of the herd or flock is tax free. However, only mature animals can be in the herd. Any farmer who keeps a production herd or flock can elect for the herd basis, subject to statutory time limits. An election for the herd basis must be made in writing to HMRC and must specify the type of herd or flock and is irrevocable. The election must be made within specified time limits generally being 12 months after the filing date of the first years accounts or where there has been a partnership change.
- For production herds on the herd basis the farmer needs to record transfers to and from the herd and the herd numbers. It is also vital to tell your accountant whether any increase or decrease in numbers reflect temporary or permanent changes to the herd as this is essential to ensure the correct tax treatment is obtained. When values of production animals are increasing or in times when there is a risk of compulsory slaughter, an election for the herd basis may be sensible.
Farm stock valuation is not easy but it is one of the most important aspects to the preparation of accurate farm accounts.