Currently, farmers are able to average their profits over two years where the difference between the profits of the two years is at least 30% of the profits for the year with the better result. Where the difference is between 25% and 30% of the profits for the better year, there is a form of tapering. Below 25%, averaging is not available.
This enables farmers to maximise the profits that are subject to basic rate income tax, and to obtain a measure of relief for fluctuating profits.
From April 2016 the period over which self-employed farmers are able to average their profits for income tax will increase from two years to five years. The government will engage with stakeholders later in the year on the detailed design and implementation of the extension.
This proposed change recognises the volatility of the agricultural sector, which can suffer from uncontrollable factors such as adverse weather. The change enables the effect of such factors to be averaged over a longer period.
We will need to see details of the proposals to establish how useful this change will be for farmers.