There are special rules which can apply to farmers and market gardeners that prepare their accounts on accruals basis. This includes special rules for farmers’ averaging relief, dealing with losses and the treatment of compensation for compulsory slaughter.

The special rules also refer to the use of the herd basis. The herd basis is a special method of calculating profits or losses which may be used by farmers who keep production livestock. Usually, farm animals are treated as trading stock. However, under the herd basis a herd or flock of production animals is excluded from trading stock and treated, in most but not all circumstances, like a capital asset.

Any farmer that wishes to use the herd basis must elect to do so. Where a herd basis election is in force, the treatment for calculating farming profits of the herd or herds covered by the election is governed by special rules. The herd basis rule can also apply where animals are jointly owned, for example, in some share-farming arrangements.

From the farmer’s point of view, the main benefits are likely to be that:

• the cost of maintaining the herd can be charged against tax; and
• any profit on its eventual disposal will be tax-free.

Note, that these special rules do not apply to farmers and market gardeners who calculate their profits using the cash basis.