188体育

S116 Income Tax (Trading and Other Income) Act 2005, S114 Corporation Tax Act 2009

Where an animal leaving the herd is replaced (see BIM55520) by another animal:

1. any proceeds from the sale of the animal leaving the herd (or insurance or compensation moneys received by reason of its death) should be included as a trading receipt; and
2. the cost of the replacement animal, excluding the cost of any improvement in quality (see below), is an allowable deduction.

Home-bred and home-reared replacements

Where the replacement animal was previously part of the farmer's trading stock (for example, a home-bred replacement), its cost will already have been deducted as an expense so no further adjustment is needed to give effect to (b). In practice therefore, the only adjustment that is required is the inclusion as a trading receipt of any proceeds etc from the sale or death of the old animal. (See the year ended 31 December 2009 in the example.)

Replacement with an animal of better quality

Where the replacement is an animal of better quality than the animal it replaces, the allowable deduction under (b) is restricted to the amount it would have cost to replace with an animal of the same quality. The `improvement element' is disallowed. (See the year ended 31 December 2010 in the example.)

Compulsory slaughter followed by replacement with an animal of worse quality

Where an animal is compulsorily slaughtered on account of disease and is replaced by an animal of worse quality, the amount included as a receipt under (a) is not to exceed the cost of the replacement animal.

Replacement in the following accounting period

Where an animal disposed of in one accounting period is known to have been replaced in the following accounting period, no objection need be raised in practice if the proceeds of the disposal are held `in suspense' until the second period when both adjustments can be made.

Example

Alison is an established sheep farmer with a flock of 100 ewes and 3 rams. A herd basis election is in force and at 31 December 2007 the cost of the flock is:

-	Amount
100 ewes @ 拢20	拢2,000
3 rams @ 拢100	拢300
-	拢2,300

In the year ended 31 December 2008, Alison sells 25 ewes for a total of 拢760 and purchases 25 new ewes at 拢40 per head.

As set out in a) and b) above:

• The 拢760 proceeds from the sale of the old ewes are included as a trading receipt.
• The 拢1,000 cost of the new ewes is an allowable deduction.

This gives a net deduction of 拢240.

In practice animals within the herd basis election are often reflected on the Balance Sheet as Fixed Assets. On this basis, the disposal of 25 ewes will give rise to a profit on disposal in the trading account of 拢260 (拢760 - 拢500). Both sale proceeds and the cost of the sale would be taken to the trading account. The 拢1,000 cost of the 25 replacement ewes would be debited to the Fixed Asset (herd) account so that as at 31 December 2008 the cost of the flock would be shown as:

-	Amount	Amount
75 ewes @ 拢20	拢1,500	-
25 ewes @ 拢40	拢1,000	-
-	-	拢2,500
3 rams @ 拢100	-	拢300
-	-	拢2,800

An adjustment is required in the Income Tax Computation to reflect the difference between what the law requires and the trading account shows. To give effect to this adjustment, add back the cost of the animals disposed (拢500) and deduct the cost of the replacements (拢1,000).

-	Amount	Amount
Profit on disposal	-	拢260
Adjustment in computation: Cost of animals disposed	拢500	-
Cost of replacements	(拢1,000)	(拢500)
Net effect	-	(拢240)

The herd has not changed, only the individual sheep making up the herd. The net cost of 拢240 is akin to the cost of maintaining the condition of the herd.

In the year ended 31 December 2009, Alison sells 20 of her original ewes for 拢640 and replaces them with 20 newly lambed gimmers (young ewes) which she has bred and reared herself at a cost of 拢30 each.

• The 拢640 proceeds from the sale of the old ewes are included as a trading receipt.
• The costs of breeding and rearing the replacements have already been deducted as part of Alison's allowable trading expenses so no further adjustment is needed.

The herd now comprises:

-	Amount	Amount
55 ewes @ 拢20	1100	-
25 ewes @ 拢40	1000	-
20 gimmers @ 拢30	600	2700
3 rams @ 拢100	300	300
-	-	3000

As above, the herd has not changed. The cost of breeding and rearing the replacements is the price of maintaining the condition of the herd.

In 2009 Alison鈥檚 accounts show a profit on disposal of 拢240 (拢640-拢400) which means that the cost of these disposals (拢400) needs to be added back in the tax computation to arrive at the correct taxable profit. As the cost of the gimmers (拢600) has already been deducted in the trading account as the cost of rearing and breeding no further adjustment is required for this.

-	Amount
Profit on disposal in trading account	拢240
Add back cost of disposal	拢400
Net effect on taxable profit	拢640

In the year ended 31 December 2010, Alison sells one ram for 拢30 and purchases a prize-winning pedigree ram for 拢4,000. The new ram is of better quality than the old. A replacement of like quality would have cost 拢500. This means:

• The 拢30 proceeds from the sale of the old ram are included as a trading receipt.
• The allowable deduction in respect of the new ram is restricted to 拢500.
• In this instance the herd has changed in that the ram quality has been improved. The improvement is reflected in the cost of the herd.

The herd account at 31 December 2010 in Alison鈥檚 accounts becomes:

-	Amount	Amount
55 ewes @ 拢20	拢1,100	-
25 ewes @ 拢40	拢1000	-
20 gimmers @ 拢30	拢600	拢2700
2 rams @ 拢100	拢200	-
1 ram @ 拢4000	拢4,000	拢4200
-	-	拢6900

The tax computation adjustments are as before. The only difference is that the cost of replacement is restricted to that what it would have cost to replace with like quality.

-	Amount	Amount
Loss on disposal in trading account	-	(拢70)
Add back cost of disposal	拢100	-
Deduct (restricted) replacement cost	(拢500)	(拢400)
Net deduction	-	(拢470)