Profit Averaging and the Herd Basis
Written and reviewed by the Agricultural Accountants editorial team. Last reviewed 27 July 2026.
Two tax tools exist only for farming, and they are the ones a high-street accountant is most likely to miss. One smooths the swing between a good year and a bad one. The other takes a breeding or dairy herd out of the trading account. Between them they can make a real difference to a farm's tax over time.
Both have conditions, and both have to be claimed correctly and in time.
Averaging Volatile Profits
Farmers and market gardeners can average their profits over two years or five, so a bumper year and a poor year are taxed closer to their average rather than one being taxed high and the other wasting allowances. Two-year averaging is available where the lower year is less than 75% of the higher, and the five-year version covers steadier but still uneven runs. HMRC sets out the tests in its helpsheet HS224.
Averaging only works on accruals accounts, not the cash basis, and it interacts with the tax bands, so a year with a big subsidy receipt or a machinery sale is exactly when it earns its keep. Deciding whether and how to average is a judgement made each year, not a one-off election.
The Herd Basis
A production herd, dairy cows or a breeding flock kept for what they produce rather than for sale, can be put on the herd basis by election. Under it the herd is treated as a capital asset: the cost of the initial herd and of increasing it is not deductible, the net cost of replacing animals is, and the profit on selling the whole herd and not replacing it falls outside trading profit. HMRC explains the effect in its Business Income Manual.
The election has strict time limits and, once made, is largely irrevocable, so it is a decision to take with advice rather than in hindsight. For a dairy or breeding enterprise it can change the tax on a herd sale or a herd reduction entirely.
Getting Both Right
These are ordinary farm-accounts work, but only if the accountant knows to look for them. They also interact with each other and with the subsidy income covered in our guide to farm subsidies, and with the timing points in our guide to basis period reform.
The herd basis election in particular is easy to miss and hard to fix after the deadline, which is one of the clearest reasons a livestock farm is better served by a specialist.