How Will the New Income Averaging Flexibility Work?

An IFA proposal allowing farmers to step out of averaging in an exceptional year was introduced in Budget 2017.

Income averaging allows farmers to opt to average their tax liability over five years so that instead of being charged tax on their farming profits in the normal way – on the profits of a 12-month period ending in the year of assessment – they are charged on the basis of the average of the aggregate farming profits and losses over five years.

The new measure announced in Budget 2017 allows farmers to ‘step out’ of income averaging in a very poor income year, meaning the farmer would only have to pay the tax due on that current year and the deferred tax liability will then be payable over the subsequent 4 year period.

IFA Proposals

As currently outlined in the Finance Bill the deferred tax liability from the income averaging ‘step out’ must be paid in four equal instalments. However, IFA has made a submission to propose greater flexibility on repayments. IFA proposes that a farmer is compliant as long as the deferred tax is paid in full at the end of the four year period.

The Finance Bill also only allows for one ‘step-out’ in a five year period. IFA has proposed that, subject to the full payment of any deferred amount from a previous ‘step-out’, a farmer should be able to opt out of income averaging more than once in a five year period. For example, if the farmer ‘steps out’ from income averaging in Year 1 and repays the deferred amount in Years 2 and 3, he should be eligible to ‘step-out’ again in Years 4 or 5 of a cycle.

We will update on the progress of IFA’s Submission on the Finance Bill here on the IFA Website and on Twitter.

Find more information about income averaging and the other tax reliefs, credits and options available to farmers.

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