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Farmers' averaging under HS224 is the first relief most advisors reach for after a season like 2026, where AHDB is reporting winter wheat at 6.8 t/ha against a five-year national average of 7.9 t/ha. Averaging helps only where profits swing hard between years, and losses count as nil in the calculation. Where the year has produced an actual loss, sideways loss relief under sections 64 to 67 ITA 2007 is usually the more useful route, subject to the five-year restriction on farming losses.
The instinct to reach for averaging comes from a run of good years in which averaging did most of the work. This year is not that year for most arable farms, and the relief that helps in a poor year is often not the one that helped in the last one. Working through which levers actually move the tax result, and in what combination, is the conversation this autumn rather than next spring.
The 2026 picture in the accounts
AHDB's harvest 2026 tracker put winter wheat yields at 6.8 t/ha to 24 August, against a five-year national average of 7.9 t/ha, a shortfall of around 13%. Winter barley finished at 6.8 t/ha, close to the ten-year average of 6.9 t/ha but still short of a good year. Winter oilseed rape was the outlier at 3.9 t/ha, above the 3.3 t/ha five-year average, and often the only line in a mostly disappointing set. Spring barley finished slower and more variable, with much of what was destined for malting quality moving to feed as the specifications were missed.
November 2026 wheat futures crossed the £200/t line at the end of August, up around 1 to 2% on the week before. Prices have moved but not by enough to compensate for the yield gap on farms working close to their input cost base. Winter oilseed rape has held up on both yield and price and has been the one crop leaving a genuine margin on many arable farms. For most mixed and arable businesses coming out of the 2026 harvest, the accounts to March or April 2027 will look materially different from those to March 2026, and the decisions being asked of the accountant before the year end matter more this year than they usually do.
Does farmers' averaging help in a loss year?
Farmers' averaging under Chapter 16 of ITTOIA 2005 lets a sole trader or partner in a farming partnership add together the profits from two consecutive years, or five consecutive years, and be taxed on the average. It is designed for exactly the kind of year 2026 has produced, but the mechanics have a catch.
The two-year test is available where the difference between the two years' profits is more than 25% of the higher figure. The five-year test compares the current year to the average of the previous four, on the same 25% test. In either case, the claim is optional. A farmer can choose the arrangement that produces the best result across the affected years, or not to average at all.
The trap is the treatment of losses. Section 221(5) ITTOIA is unambiguous: for the purpose of the averaging calculation, if there is a loss in any year, the profits of that year are treated as nil. That was tested in Percy Donaghy v HMRC, where the taxpayer argued that losses ought to be netted against profits in the averaging calculation and the First-tier Tribunal disagreed in short order. The rule stands, and it changes the arithmetic in a year with a genuine loss.
Averaging is the reflex, not always the answer. In a year with an actual loss, other reliefs often move more of the tax than averaging does.
Where profits have compressed but the farm has stayed in the black, averaging is likely to help, particularly for higher-rate taxpayers whose income sits in a band that averaging can pull below the higher-rate threshold. Where the year has produced an actual loss, the loss cannot be averaged in, and other reliefs need to run first. The check to make in advance of any claim is to model the averaging outcome against the loss relief outcome, not to assume the two are alternatives when they are more often complementary.
Sideways loss relief and the section 67 restriction
Trade loss relief against general income, under sections 64 to 66 ITA 2007, lets a farming loss be set against other income of the same year, the previous year, or both. For a farming family with off-farm income, a rental portfolio, or a spouse's employment, that can be the most efficient use of a bad year. Loss relief carried back to the previous year can produce a repayment of tax already paid, and the interest position, running from 31 January after the later tax year under FA 2009, makes lodging the claim sooner rather than later worth doing.
Section 67 ITA 2007 is the point where farming attracts special treatment. Where a farming trade has produced losses (computed without capital allowances) in each of the previous five tax years, sideways loss relief is not available for the current year unless the taxpayer can show a reasonable expectation of profit from the trade as a whole and that a reasonable person would have expected profits. The rule catches loss-making farming activities that HMRC treats as hobby farming or lifestyle farming. For commercial farms with a genuine trading intent, a single bad year does not trigger the restriction. A run of poor years does bring section 67 into scope, and the file needs to show how the position is being managed. This is worth reviewing now for farms that have posted losses in more than one of the last few years, before the return is filed and the position becomes harder to defend on retrospective evidence.
The herd basis and livestock timing
For livestock farms, the herd basis election under HS224 sits alongside averaging as a mechanism for smoothing between years. Where a herd has been elected onto the herd basis, the value of the herd sits outside trading stock. A partial reduction in the herd during a poor year, or a decision to over-winter animals rather than sell into a soft market, is treated differently under the herd basis than under the trading stock rules. Farms that have not made the herd election, and that are now considering it in the light of a poor year, need to look at the practical requirement to make the election in the first year of keeping the herd (or within two years of a partnership change) and the interaction with any planned changes to the trading structure.
Timing of livestock sales inside the current accounting period is one of the year-end levers that gets used most and thought about least. Bringing forward or delaying sales around the year end can move meaningful income across the boundary. It only helps if the pricing decision and the tax decision agree, so the two conversations should happen in the same room.
Capital allowances and the year-end machinery decision
The full £1 million Annual Investment Allowance remains available, and full expensing continues to apply to new plant and machinery bought by companies. For a farm that has already reached its AIA on a machinery purchase, deferring further capital expenditure into the next accounting period may make sense in a year where taxable profits are low anyway, so that the allowances land against higher-rate profits in a better year. For a farm that has not, bringing spend forward can create allowances in a year where they are most useful. The instinct in a bad year is to hold cash and defer everything; the tax result is often the opposite of the cash instinct, and the two decisions need to be reconciled before the year end rather than after.
Second-hand machinery bought by a company qualifies for AIA but not for full expensing, which continues to apply only to new assets. That matters where farms have been buying carefully in a used market that has held its prices, because the tax result is not the same as the equivalent new purchase.
The decisions worth having on the desk now
The decisions that move the tax result for the 2026 harvest year are the ones being made in the September to March window: livestock sale timing, machinery expenditure, herd basis elections, fertiliser ordering, contract deferrals, and the choice between two-year and five-year averaging. Once the accounts are drafted in April or May, most of the levers have already moved. The advisor conversation this autumn is more useful than the one next spring, and it is worth having it before the winter cashflow decisions get taken on their own terms.
To discuss farm tax planning around the 2026 harvest year, contact the agribusiness team.
This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.
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