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Foot and Mouth disease
The Revenue has been asked whether a herd basis election lapses if a partnership converts to a limited liability partnership without a change in membership. The answer is no. This is because the limited liability partnership is deemed to be a partnership, has the same members, and so is not a different farmer.
New extra-statutory concession
Foot and Mouth disease
The Revenue has been asked whether a herd basis election lapses if a partnership converts to a limited liability partnership without a change in membership. The answer is no. This is because the limited liability partnership is deemed to be a partnership, has the same members, and so is not a different farmer.
New extra-statutory concession
Where a farmer buys in or breeds replacements for ewes culled from his herd, they do not normally (there are special rules for home bred replacements in hefted flocks) enter the herd until they bear their first lamb. That is because of the definition of maturity in the herd basis rules (paragraph 8(2) to (4) of Schedule 5 to the Taxes Act 1988). In some flocks, slaughter took place this year during lambing with the result that some ewes were slaughtered before they gave birth, but others from the same batch of intended replacements may have had lambs at foot when they were slaughtered.
This may lead to an unexpected profit because animals which were slaughtered before they enter the herd are treated as trading stock. A new concession, which applies to animals slaughtered as a result of the present outbreak of Foot and Mouth disease, enables farmers to treat such animals as if they had entered the herd before slaughter. Similar situations may arise with animals other than sheep, so the concession is written in general terms. The text is as follows:
Where a farmer has disposed of production animals subject to a herd basis election with the intention of replacing them with young animals which would have qualified as replacements when they gave birth to their first young; and the intended replacements did not give birth to their first young because they were slaughtered while pregnant as a result of the 2001 Foot and Mouth disease outbreak; the intended replacements may be regarded as mature for the purposes of paragraph 8(4) of Schedule 5 to the Taxes Act 1988.
The concession does not apply to animals which were intended to be additions to a herd, but any profit arising on the slaughter of such animals may be spread under Extra-statutory Concession B11.
Forward spreading under Concession B11
The Inspector's Manual at paragraph IM2268b suggests that for animals born in the year of slaughter, profit can be computed as compensation less 75 per cent. That figure is correct for sheep and pigs, but the figure for cattle in BEN19 is 60 per cent. The use of 60 per cent for cattle will be acceptable to the Revenue here as well.
Quality of replacement animals
When animals on the herd basis rules are replaced, the normal rules provide that the proceeds of the old animal are included and the cost (subject to an appropriate restriction if the replacement is of better quality) of the new animal is deducted in computing the farming profits. The special rule in paragraph 3(6) of Schedule 5 to the Taxes Act 1988 (Inspector's Manual at paragraph IM2305) says that if slaughtered animals are replaced by animals of lower quality then the amount included as a trading receipt shall not exceed the amount allowable as a deduction. The effect is that when a farmer replaces a herd with animals of lower quality which cost less than the compensation received for the old animals, the excess of the compensation over the cost of the new animals is not taxable.
The Revenue has been asked how it interprets the term 'quality' in this context. The quality of an animal is a question of fact. It does not follow that if the cost of the replacement is lower or higher than the proceeds of the animal slaughtered, then the quality is lower or higher for two reasons:
* Quality does not depend upon age. But the compensation might reflect the fact that the animal concerned was getting to the end of its productive life. A replacement might cost more because it was younger.
* Price depends upon the state of the market on the day. There is a strong correlation between quality and price, but a poor animal next month might cost more or less than a good one this month.
In many cases, the amount of compensation for the slaughtered animals depended upon quality and professional valuers advised when compensation was quantified. In the event of doubt, the farmer might instruct the same valuer to give an opinion as to whether the replacements were of different quality.
Accumulation and maintenance trusts
The Revenue has been asked whether the mere existence of a power to appoint (which does not offend the conditions of section 71(1)(a), Inheritance Tax Act 1984) in favour of beneficiaries who are not grandchildren of a common grandparent will take the settlement outside the common grandparent rule. The Revenue has said that in its opinion the mere existence of such a power, as opposed to its actual exercise, does not take a trust outside the common grandparent category.
The foregoing are extracts from longer articles published in the Tax Bulletin which is Crown copyright, and to which reference should be made for details of the full text. For information regarding subscription, contact Ms Nahid Shariff on 020 7438 7842. It is also available free of charge at www.inlandrevenue.gov.uk.
