The impact of severe and increasingly prolonged weather conditions can result in significant fluctuations in farm income between one year and another, as can price volatility. As a result the effective rate of tax suffered on farm profits can be much higher than had they arisen more evenly. This can be particularly damaging as farming is an extremely capital intensive industry which requires substantial investment.
The NFU has long argued for further fiscal measures to help farmers manage the impact of volatility. We were therefore pleased when the Chancellor announced that the government would, with effect from April 2016, extend farmers profit averaging to five years to help farmers.
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When the extension was announced we originally envisaged it might allow farmers to average over the actual period of volatility, whether this was 2,3,4 or 5 years. However the consultation proposes a 5 year averaging period which HMRC's modelling suggests will generally produce the best outcome whilst limiting complexity. There are two main options proposed, the first includes a volatility test and operates by election each year in a similar way to the current rules. The second has no volatility test but requires the farmer to opt in for a five year period in advance which is similar to the method of farmers averaging that operates in the Republic of Ireland.
The NFU has engaged with HMRC throughout the consultation period and we have now submitted our formal response which is available to all members.