Herd basis election

If you keep animals for production purposes, you might be able to take advantage of the “herd basis” to simplify calculating your taxable profits.

Production

Farm animals are treated as trading stock. For tax and accounting purposes these animals are more akin to capital assets than trading stock, and so it is possible to make a special election for them not to be treated as such.

Herd basis

Where a Herd Basis Election is made, a number of rules apply when calculating profits:

• the initial cost of the herd isn’t an allowable deduction, nor is the cost of any subsequent increase in herd size
• the net cost of replacing animals in the herd (but not any element of improvement) is an allowable deduction
• where the odd animal, or just a few amounting to less than 20% of the herd, are sold from the herd and not replaced, the resulting profit or loss is taken into account in arriving at the farming profits
• where the whole herd, or a substantial part (20% or more), is sold and not replaced, the resulting profit or loss isn’t taken into account.

This last point is where a real tax saving can be made.

There is no special format for making an election, however it:

• must be made in writing
• must specify the class of herds to which it relates
• normally takes effect from when the farmer first starting keeping a production herd of the specified class.

Once made, the herd basis will apply to all animals of the same class. A separate election is required for different classes of animal.

Time limit

You must make the election by no later than the statutory time limit. For a sole trader, this is the first anniversary of the normal self-assessment filing date for that tax year, so for 2023/24 it would be 31 January 2025. Once made, an election cannot be revoked, and applies to the class of animals it covers for however long they are kept.