Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 8 — Trade profits: herd basis rules
51

(6)
References in this Chapter to an animal being added to a herd include
references to an immature animal that is not part of the herd reaching maturity.
(7)
This Chapter applies—
(a)
in relation to animals kept singly as it applies in relation to herds, and
(b)
in relation to shares in animals as it applies in relation to animals
5
themselves.
113
Other interpretative provisions
(1)
This section applies for the purposes of this Chapter.
(2)
A production herd kept by a farmer is of the same class as another production
herd only if—
10
(a)
the animals kept in both herds are of the same species (irrespective of
breed), and
(b)
the products produced for the farmer to sell (for which the herds are
wholly or mainly kept) are of the same kinds in both herds.
(3)
References to the sale of an animal include references to its death or
15
destruction.
(4)
References to the sale proceeds of an animal include references to—
(a)
money received from an insurer because of the animal’s death or
destruction,
(b)
compensation money received because of the animal’s death or
20
destruction, and
(c)
the sale proceeds of the animal’s carcass or any part of its carcass.
(5)
Female animals become mature—
(a)
in the case of laying birds, when they first lay, and
(b)
in any other case, when they produce their first young.
25
(6)
20% or more of a herd is a substantial part of the herd, but a lesser percentage
than 20% is capable of being a substantial part of the herd depending on the
circumstances of the case concerned.
The herd basis rules
114
Initial cost of herd and value of herd
30
(1)
In calculating the profits of the trade, no deduction is allowed for the initial cost
of the herd.
(2)
In calculating the profits of the trade, the value of the herd is not brought into
account.
115
Addition of animals to herd
35
(1)
This section applies for the purpose of calculating the profits of the trade if an
animal is added to the herd, unless it replaces another animal in the herd.
(2)
No deduction is allowed for the cost of the animal.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 8 — Trade profits: herd basis rules
52

(3)
If, immediately before it was added to the herd, the animal was part of the
farmer’s trading stock, the balancing amount is brought into account as a
receipt.
(4)
“The balancing amount” means—
(a)
in the case of an animal bred by the farmer, the cost of breeding the
5
animal and rearing it to maturity, and
(b)
in any other case, the sum of the initial cost of acquiring the animal and
the cost (if any) incurred by the farmer in rearing the animal to
maturity.
116
Replacement of animals in herd
10
(1)
This section applies for the purpose of calculating the profits of the trade if—
(a)
an animal (“the old animal”) is sold from the herd or otherwise ceases
to be part of the herd, and
(b)
it is replaced in the herd by another animal (“the new animal”).
(2)
The sale proceeds (if any) of the old animal are brought into account as a
15
receipt.
(3)
But this needs to be read with—
(a)
section 117 (amount of receipt if old animal slaughtered under disease
control order),
(b)
section 120 (acquisition of new herd begun within 5 years of sale), and
20
(c)
section 122 (replacement of part sold begun within 5 years of sale).
(4)
Except so far as otherwise allowable, a deduction is allowed under this section
for the cost of the new animal.
(5)
But if the new animal is of better quality than the old animal, the amount of the
deduction must not exceed the amount that it would have been necessary to
25
spend to replace the old animal with an animal of the same quality.
117
Amount of receipt if old animal slaughtered under disease control order
(1)
This section applies for the purposes of section 116.
(2)
If—
(a)
the old animal was slaughtered under a disease control order, and
30
(b)
the new animal is of worse quality than the old animal,

the amount brought into account as a receipt under section 116 must not
exceed the equivalent amount for the new animal.
(3)
For this purpose “a disease control order” means an order made under the law
relating to the diseases of animals by—
35
(a)
central government,
(b)
a devolved authority,
(c)
a local authority, or
(d)
another public authority.
(4)
If, immediately before it was added to the herd, the new animal was part of the
40
farmer’s trading stock, “the equivalent amount for the new animal” means—
(a)
in the case of an animal bred by the farmer, the cost of breeding the
animal and rearing it to maturity, and

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 8 — Trade profits: herd basis rules
53

(b)
in any other case, the sum of the initial cost of acquiring the animal and
the cost (if any) incurred by the farmer in rearing the animal to
maturity.
(5)
Otherwise “the equivalent amount for the new animal” means the cost of the
new animal.
5
118
Sale of animals from herd
(1)
This section applies for the purpose of calculating the profits of the trade if an
animal is sold from the herd unless—
(a)
it is replaced in the herd by another animal (see section 116), or
(b)
it is sold as part of the sale of the whole or a substantial part of the herd
10
that takes place all at once or over a period not longer than 12 months
(see section 119).
(2)
A profit arising from the sale is brought into account as a receipt.
(3)
A deduction is allowed for a loss arising from the sale.
(4)
The amount of the profit or loss is the difference between the sale proceeds of
15
the animal and the deductible amount for the animal.
(5)
“The deductible amount for the animal” means—
(a)
in the case of an animal bred by the farmer, the cost of breeding the
animal and rearing it to maturity,
(b)
in the case of an animal acquired by the farmer for valuable
20
consideration, the sum of the initial cost to the farmer of acquiring the
animal and the cost (if any) incurred by the farmer in rearing the animal
to maturity, and
(c)
in the case of an animal acquired by the farmer but not for valuable
consideration, the sum of the market value of the animal when
25
acquired and the cost (if any) incurred by the farmer in rearing the
animal to maturity.
119
Sale of whole or substantial part of herd
(1)
This section applies for the purpose of calculating the profits of the trade if,
either all at once or over a period not longer than 12 months, the herd or a
30
substantial part of the herd is sold unless—
(a)
section 120 applies (acquisition of new herd begun within 5 years of
sale), or
(b)
section 122 applies (replacement of part sold begun within 5 years of
sale),
35

but paragraph (a) is subject to subsection (5) of section 120 (so far as that section
provides for a case in which this section is to apply).
(2)
A profit arising from the sale is not brought into account as a receipt.
(3)
No deduction is allowed for a loss arising from the sale.
120
Acquisition of new herd begun within 5 years of sale
40
(1)
This section applies for the purpose of calculating the profits of the trade if—

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 8 — Trade profits: herd basis rules
54

(a)
either all at once or over a period not longer than 12 months, the herd
(“the old herd”) is sold, and
(b)
the farmer acquires or starts to acquire another production herd of the
same class (“the new herd”) within 5 years of the sale.
(2)
Section 116 (replacement of animals in herd) applies as if a number of animals
5
equal to—
(a)
the number of animals in the old herd, or
(b)
if smaller, the number of animals in the new herd,

had been sold from the old herd and replaced in that herd (but see section 121
(sale for reasons outside farmer’s control)).
10
(3)
For the purposes of section 116, the sale proceeds of an animal that is treated as
a result of subsection (2) above as if it had been—
(a)
sold from the old herd, and
(b)
replaced in that herd by another animal (“the new animal”),

are not brought into account as a receipt until the new animal is acquired.
15
(4)
If—
(a)
the number of animals in the new herd is smaller than the number of animals
in the old herd, and
(b)
the difference is not substantial,

section 118 (sale of animals from herd) applies as if a number of animals equal to the
20
difference had been sold from the old herd.
(5)
If the number of animals in the new herd is smaller than the number of animals
in the old herd and the difference is substantial—
(a)
section 119 (sale of whole or substantial part of herd where replacement
not begun within 5 years), or
25
(b)
section 122 (sale of substantial part of herd where replacement begun
within 5 years),

applies as if a number of animals equal to the difference had been sold from the
old herd.
(6)
If the number of animals in the new herd is larger than the number of animals
30
in the old herd, section 115 (addition of animals to herd) applies as if a number
of animals equal to the difference had been added to the old herd.
(7)
For the purposes of this section—
(a)
if the difference between the number of animals in the new herd and
the number of animals in the old herd is equal to 20% or more of the
35
number of animals in the old herd, the difference is substantial, but
(b)
a lesser percentage than 20% is capable of being a substantial difference
depending on the circumstances of the case concerned.
121
Section 120: sale for reasons outside farmer’s control
(1)
This section applies for the purposes of section 116, as applied by section
40
120(2).
(2)
If—
(a)
the farmer was compelled to sell the old herd for reasons wholly
outside the farmer’s control, and

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 8 — Trade profits: herd basis rules
55

(b)
an animal (“the new animal”) that is treated as a result of section 120(2)
as if it replaced an animal sold (“the old animal”) is of worse quality
than the old animal,

the amount brought into account as a receipt under section 116 must not
exceed the equivalent amount for the new animal.
5
(3)
If, immediately before it was added to the herd, the new animal was part of the
farmer’s trading stock, “the equivalent amount for the new animal” means—
(a)
in the case of an animal bred by the farmer, the cost of breeding the
animal and rearing it to maturity, and
(b)
in any other case, the sum of the initial cost of acquiring the animal and
10
the cost (if any) incurred by the farmer in rearing the animal to
maturity.
(4)
Otherwise “the equivalent amount for the new animal” means the cost of the
new animal.
122
Replacement of part sold begun within 5 years of sale
15
(1)
This section applies for the purpose of calculating the profits of the trade if—
(a)
either all at once or over a period not longer than 12 months, a
substantial part of the herd is sold, and
(b)
the farmer acquires or starts to acquire animals to replace the part sold
within 5 years of the sale.
20
(2)
Section 116 (replacement of animals in herd) applies so far as the animals
included in the part sold are replaced (but see section 123 (sale for reasons
outside farmer’s control)).
(3)
The sale proceeds of an animal included in the part sold are not brought into
account as a receipt until the animal that replaces it in the herd is acquired.
25
(4)
If some of the animals included in the part sold are not replaced—
(a)
a profit arising from their sale is not brought into account as a receipt,
and
(b)
no deduction is allowed for a loss arising from their sale.
123
Section 122: sale for reasons outside farmer’s control
30
(1)
This section applies for the purposes of section 116, as applied by section
122(2).
(2)
If—
(a)
the farmer was compelled to sell the part of the herd for reasons wholly
outside the farmer’s control, and
35
(b)
an animal (“the new animal”) that replaces an animal sold (“the old
animal”) is of worse quality than the old animal,

the amount brought into account as a receipt under section 116 must not
exceed the equivalent amount for the new animal.
(3)
If, immediately before it was added to the herd, the new animal was part of the
40
farmer’s trading stock, “the equivalent amount for the new animal” means—
(a)
in the case of an animal bred by the farmer, the cost of breeding the
animal and rearing it to maturity, and

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 8 — Trade profits: herd basis rules
56

(b)
in any other case, the sum of the initial cost of acquiring the animal and
the cost (if any) incurred by the farmer in rearing the animal to
maturity.
(4)
Otherwise “the equivalent amount for the new animal” means the cost of the
new animal.
5
Elections
124
Herd basis elections
(1)
A herd basis election must specify the class of production herd to which it
relates.
(2)
A herd basis election must be made—
10
(a)
on or before the first anniversary of the normal self-assessment filing
date for the tax year in which the first relevant period of account ends,
or
(b)
if that is the tax year in which the farmer starts to carry on the trade and
the farmer is not a firm, on or before the second anniversary of the
15
normal self-assessment filing date for that tax year.
(3)
“The first relevant period of account” means the first period of account in
which the farmer making the election keeps a production herd of the class to
which the election relates (but see subsection (8)).
(4)
A herd basis election cannot relate to more than one class of production herd,
20
but separate elections may be made for different classes.
(5)
A herd basis election is irrevocable.
(6)
A herd basis election has effect in relation to all production herds of the class
to which it relates, including any which the farmer—
(a)
has ceased to keep before making the election, or
25
(b)
first keeps after making the election.
(7)
A herd basis election has effect for every period of account in which the
farmer—
(a)
carries on the trade, and
(b)
keeps a production herd of the class to which the election relates.
30
(8)
If the farmer is a firm and there is a change in the persons who are partners in
the firm—
(a)
any herd basis election made by the old firm ceases to have effect, and
(b)
in relation to the new firm, “the first relevant period of account” means
the first period of account in which the new firm keeps a production
35
herd of the class to which the election relates.
125
Five year gap in which no production herd kept
(1)
This section applies if a farmer—
(a)
keeps a production herd of a particular class, and
(b)
ceases altogether to keep herds of that class for a period of at least 5
40
years.
(2)
If the farmer keeps a production herd of that class after the end of that period—

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 8 — Trade profits: herd basis rules
57

(a)
the period of account in which the farmer starts to keep the herd is
treated as the first period of account in which the farmer keeps a
production herd of that class, and
(b)
any herd basis election previously made by the farmer in relation to
production herds of that class ceases to have effect.
5
126
Slaughter under disease control order
(1)
This section applies if—
(a)
the whole or a substantial part of a production herd kept by a farmer is
slaughtered under a disease control order, and
(b)
the circumstances of the slaughter are such that compensation is
10
payable in respect of the animals slaughtered.
(2)
The farmer may make a herd basis election in respect of the class of production
herd involved in the slaughter as if the period of account —
(a)
in which the compensation falls to be brought into account in
calculating the profits of the trade, or
15
(b)
in which it would (but for the election) fall to be so brought into
account,

were the first period of account in which the farmer keeps a production herd
of that class.
(3)
An election made as a result of this section has effect for that period of account
20
and every subsequent period of account in which the farmer—
(a)
carries on the trade, and
(b)
keeps a production herd of the class to which the election relates.
(4)
In this section “disease control order” means an order made under the law
relating to the diseases of animals by—
25
(a)
central government,
(b)
a devolved authority,
(c)
a local authority, or
(d)
another public authority.
Preventing abuse of the herd basis rules
30
127
Preventing abuse of the herd basis rules
(1)
This section applies if—
(a)
a person carrying on a trade (the “transferor”) transfers the whole or
part of a production herd to another person (the “transferee”),
(b)
the transfer is not by way of sale or is by way of sale but for a price other
35
than that which the animals sold would have fetched if sold in the open
market, and
(c)
the control condition or herd basis benefit condition is met.
(2)
The control condition is met if—
(a)
the transferor is a body of persons over which the transferee has
40
control,
(b)
the transferee is a body of persons over which the transferor has
control, or