The herd basis election for farmers

The herd basis lets a farmer treat a production herd, such as dairy cows or breeding ewes, more like a capital asset than trading stock: the cost of setting up or enlarging the herd is not deducted, but the net cost of replacements is, and a profit on selling the whole herd or a substantial part of it without replacing it is not taxed. It applies only if the farmer makes an irrevocable election, normally by the first anniversary of the normal Self Assessment filing date for the tax year in which the first period of account with that class of herd ends, or two years after the end of the first accounting period for a company.

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What is the herd basis and why does it exist?

Farm animals are normally trading stock, so their value at each year end feeds into taxable profit and any sale is a trading receipt. HMRC’s Business Income Manual at BIM55501 explains that some animals are kept not for resale but for their products, such as milk or eggs, or for their young, such as lambs or piglets, and are in many ways more like capital assets. Sections 111 to 129 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA), and sections 109 to 127 of the Corporation Tax Act 2009 for companies, let the farmer elect to take such a herd out of trading stock. HMRC summarises the main benefits as tax relief for the cost of maintaining the herd and no tax on any profit when it is eventually sold.

Although the rules talk about farmers, section 111(3) applies them to anyone who keeps a production herd for the purposes of a trade, and BIM55565 notes this can include animal or fish breeding.

Which animals count as a production herd?

Section 112 defines a production herd as animals of the same species, irrespective of breed, kept wholly or mainly for the products obtainable from the living animal which the farmer sells: their young, or anything else taken without slaughtering them. “Herd” includes a flock, and the rules also apply to animals kept singly and to shares in animals.

Class of herd: herds are of the same class only if the species and the products are the same (section 113(2)). BIM55590 gives the example that a Friesian and an Ayrshire dairy herd are one class, but a dairy herd and a beef suckler herd are two.
Immature animals: generally they are not part of the herd (section 112(3)). A female becomes mature when she produces her first young, or a laying bird when she first lays (section 113(5)). Home bred replacements are therefore trading stock until maturity, when they move into the herd.
Hill flocks exception: where the nature of the farm means losses can only be replaced by animals bred and reared there, immature replacements can count, but only to the extent needed to stop numbers falling (section 112(4) and (5)). BIM55580 says this normally only applies to certain heafted flocks of hill sheep.

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How are purchases, replacements and sales taxed?

Once an election has effect, sections 114 to 123 apply instead of the trading stock rules:

Setting up the herd: no deduction for the initial cost, and the herd’s value is not brought into account (section 114).
Adding to the herd: no deduction for an animal that increases the herd rather than replacing one. If it came from the farmer’s own trading stock, its cost of breeding or buying and rearing is credited as a receipt (section 115).
Replacing an animal: the sale proceeds of the old animal are a receipt and the cost of the new one is deducted. If the new animal is of better quality, the deduction is capped at the cost of a like for like replacement (section 116). Where an animal was slaughtered under a disease control order and replaced by a worse quality animal, the receipt is limited (section 117).
Selling a few animals without replacement: the profit or loss against cost is taxed or relieved as part of the trading profit (section 118).
Selling the whole herd or a substantial part within twelve months: the profit is not taxed and a loss is not relieved (section 119), unless replacement begins within five years.

“Substantial” means 20% or more of the herd, though a smaller percentage can be substantial on the facts (section 113(6)). If the farmer starts to acquire a new herd of the same class within five years of selling the old one, section 120 treats the animals as replaced, so the proceeds become taxable receipts against the cost of the new animals, with protection under section 121 where the sale was forced for reasons wholly outside the farmer’s control. Section 122 does the same for a substantial part sold and replaced within five years. In practice, BIM55520 says HMRC may accept replacement treatment where the new animal joins within twelve months of the old one leaving.

What is the deadline for the election?

The election must specify the class of herd and is irrevocable (section 124). BIM55600 sets out the time limits:

Who	Deadline
Sole trader	First anniversary of the normal Self Assessment filing date for the tax year in which the first period of account with a herd of that class ends. If that is the first tax year of the trade, the second anniversary instead.
Partnership	First anniversary of the normal Self Assessment filing date for the tax year in which the first period of account with a herd of that class ends.
Company	Two years after the end of the first accounting period in which it keeps a herd of that class (Corporation Tax Act 2009, section 122(2)).

The election takes effect from when the farmer first kept a herd of that class. BIM55585 says it must be in writing but there is no special form, and accounts or computations that clearly use the herd basis for a class of animals may be treated as an election. After an election HMRC can issue form 10F asking for information about the herd (BIM55620).

Fresh chances to elect

Compulsory slaughter: if the whole or a substantial part of a herd is slaughtered under a disease control order and compensation is payable, section 126 gives a new right to elect, treating the period in which the compensation is brought into account as the first period.
Five year gap: if the farmer keeps no herd of that class for at least five years, any old election lapses and a new one can be made when a herd is kept again (section 125).
Partnership changes: any change in the partners ends the old firm’s election, and the new firm has its own right to elect (section 124(8), BIM55610).
Change of use: BIM55615 says converting a dairy herd to beef suckler production ends the dairy election, because the class has changed, although a fresh election can be made for the new herd.

Can you use the herd basis with the cash basis?

No. Section 111A ITTOIA says nothing in the herd basis Chapter applies when profits are calculated on the cash basis, and GOV.UK’s cash basis guidance lists a farming business with a current herd basis election among those that cannot use the cash basis. As the cash basis is now the default for many sole traders and partnerships, a farmer who wants the herd basis must use traditional accounting. See cash basis versus accruals accounting.

Worked example

Illustration only. A farmer elects for the herd basis for a dairy herd bought for £100,000. No deduction is given for that cost. Later, ten cows are culled and sold for £6,000 and replaced with ten heifers of similar quality costing £12,000: the £6,000 is a receipt and the £12,000 a deduction, a net deduction of £6,000. Years later the farmer sells the whole herd for £150,000 and does not restock with dairy cows within five years. The profit on the herd is not taxed. Had the cows been trading stock, the £150,000 would have been a trading receipt against their book value.

What mistakes do farmers and advisers make?

Missing the deadline in the first year a class of herd is kept, then finding the only later opportunities are compulsory slaughter or a five year gap.
Assuming one election covers every herd. It covers one class only.
Forgetting that a partnership change cancels the election.
Treating home bred heifers as herd animals before they have calved.
Deducting the full cost of a higher quality replacement.
Staying on the cash basis while claiming herd basis treatment.
Moving animals between connected businesses at an undervalue to gain a herd basis benefit. Section 127 substitutes open market value.

The herd basis is a tax rule only; it does not change how livestock is presented in the accounts. See agriculture and biological assets under FRS 102. For volatile farm profits, see also averaging for farmers and the five year rule for farming losses.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.