It is now generally accepted that volatility is a feature of every farm enterprise, resulting in variations in farm profits from one year to another, with cash-flow implications. Such variations in farm profits can have significant consequences in terms of the payment of tax, writes Seamus McCaffrey, Accountant based in Omagh. 
For example, a farm with an accounting year-end of March 31, 2015 may have enjoyed a high profit and, if that profit was retained in the business, the balance of tax for that year must be paid by January 31 2016, in a period of low prices. The paying of the tax on January 31, 2016 may cause a cash-flow problem.
Revenue and Customs recognise the cash-flow implications of fluctuating profits by the existence of “averaging” legislation.
In order to avail of an averaging claim the trade must be either farming or market-gardening, including the rearing of livestock and fish. 
Averaging is not available where the trade is agricultural contracting, haulage or a caravan site, or where the farm business is carried on outside the UK. Only a person liable to UK income tax can make an averaging claim; this means sole traders, partners, executors and personal representatives of an estate are eligible. A limited company or a partner in a corporate partnership cannot make an averaging claim. 
Currently, an averaging claim can cover any two consecutive years of assessment during which a farming trade is carried on, except the year of assessment in which the trade commenced or ceased.
There are two types of averaging: full averaging and partial averaging. 
Full averaging applies where the lower figure does not exceed 70 per cent of the higher figure; partial averaging is where the lower figure is between 70 and 75 per cent of the higher figure.  Where the above applies, the two years may be averaged.  The profit of the later year becomes the sum of the two profits divided by two.  The profit of the earlier year is unchanged, but the tax due for the later year is adjusted up or down.  The figure used for each year is the figure after Capital Allowances.  A trading loss is treated as NIL profit for averaging purposes.
Recently, Revenue and Customs announced that, with effect from April 6 2016, farmers will be able to choose between averaging over two and  five years.  
If a farmer elects for five-year averaging, the trading results, after Capital Allowances, back to 2012-13 can be considered.  For five-year averaging to apply, the profits of the fifth year must be less than 75 per cent of the averaged profits of the four previous years.
An averaging claim must be submitted to Revenue and Customs no later than 22 months after the end of the second year of assessment.  
Where the farm business is a partnership, not all partners need to elect; only those where a claim is beneficial.  Other relevant reliefs, such as loss relief and pension contributions must also be considered.
Averaging of farm profits by sole traders or partners can be useful to calculate tax payable by January 31, 2016 but does require detailed consultation with the accountant.