Annex 1: Minor changes in the law made by the Act: Change 34: Herd basis elections: time limit for making election: section 124
This change relates to the time limit for making a herd basis election under paragraph 2 of Schedule 5 to ICTA.
An election must normally be made within a specified period, based on when the farmer first keeps a production herd of the particular class. The ordinary rule for farmers except those trading in partnership is set out in paragraph 2(3)(a) of Schedule 5 to ICTA. This provides that the election must be made “not later than twelve months from the 31st January next following the qualifying year of assessment”. The qualifying year of assessment is then defined in paragraph 2(6) of Schedule 5 to ICTA as “the first year of assessment after the commencement year for which the amount of profits or losses … is computed for tax purposes by reference to the facts of a period during the whole or part of which [the farmer] kept such a herd”.
For firms the position is slightly different. Paragraph 2(3)(b) of Schedule 5 to ICTA states that they must make an election “not later than twelve months from the 31st January next following the year of assessment in which the qualifying period of account ends”. This means that, provided a partnership’s first period of account extends into the second tax year, it will get longer to make an election.
Section 124 merges the two rules. This change of approach simplifies the law by having a common rule for all farmers. It sets the time limit for all farmers in the same way as for a firm, by referring to the period of account in which the herd is first kept. In most cases, this rule gives the same time limit as that in paragraph 2(3)(a) of Schedule 5 to ICTA. But it may also benefit some taxpayers by giving them longer to make the election if the first period of account in which they keep the production herd extends into a second tax year.
	Example 1A farmer starts to keep a herd of a particular class on 1 March 2006. The accounts of the farming trade are made up to 31 December annually:The ICTA rule: The first (basis) period in which the farmer keeps the herd is the year ended 31 December 2006. So the “qualifying year of assessment” is 2006-07 and the time limit is 31 January 2009.The rule in section 124: The “relevant period of account” is the year ended 31 December 2006. That ends in 2006-07. So the time limit is 12 months from 31 January 2008, that is 31 January 2009.But, if the farmer has a period of account longer than 12 months and first keeps the herd early in the period, the time limit may change.
	Example 2A farmer starts to keep a herd of a particular class on 1 March 2006. This is in a period of account that runs from 1 January 2006 to 30 June 2007. The basis period for 2006-07 is the year ended 30 June 2006 (see section 214(4)). The basis period for 2007-08 is the year ended 30 June 2007, the new accounting date:The ICTA rule: The first (basis) period in which the farmer keeps the herd is the year ended 30 June 2006. So the “qualifying year of assessment” is 2006-07 and the time limit is 31 January 2009.The rule in section 124: The “relevant period of account” is the 18 months ended 30 June 2007. That ends in 2007-08. So the time limit is 12 months from 31 January 2009, that is 31 January 2010.
This change is in the taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.