Farm accounts use tax rules that few other businesses touch, including averaging of profits, the herd basis, the agricultural flat rate scheme for VAT and a farmhouse that is both a home and the base of the business. Each involves a judgement HMRC can ask you to support. Tax investigation insurance pays your accountant’s professional fees if HMRC opens a check after the cover starts.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

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Which tax rules apply to farmers?

Farming has its own chapter in HMRC’s Business Income Manual:

  • Averaging. Individual farmers and market gardeners can average profits over two or five consecutive tax years where profits are volatile, which HMRC measures by reference to profits of less than 75% of the profits of the other years. Sole traders and partners can claim, but corporate partners are excluded, as are agricultural contracting and trades with substantial non farming activities.
  • Herd basis. A farmer can elect to take a production herd or flock out of trading stock. The election must be in writing and identify the class of animals, it is irrevocable, and a profit on eventually disposing of the herd is tax free. Anyone with a herd basis election cannot use the cash basis.
  • One trade. All farming carried on in the UK by the same person, company or partnership is treated as a single trade.
  • Farmhouse expenses. Under the wholly and exclusively rule, only the business proportion of costs such as heating, lighting, repairs, maintenance and insurance is allowable.

Making Tax Digital for Income Tax adds a reporting duty. On the gov.uk guidance, it applies from 6 April 2026 where qualifying income on the 2024 to 2025 return is more than £50,000, from 6 April 2027 where income on the 2025 to 2026 return is more than £30,000, and from 6 April 2028 where income on the 2026 to 2027 return is more than £20,000. Qualifying income is total self employment and property income before expenses, so a farm with high sales and thin margins can be in scope early.

How does VAT work on a farm?

HMRC’s Agricultural Flat Rate Scheme, set out in VAT Notice 700/46, is an alternative to VAT registration. A certified flat rate farmer does not account for VAT or submit returns and cannot reclaim input tax, but can add a flat rate addition of 4% when selling to VAT registered customers, even where those sales would be zero rated.

To join, your annual turnover from farming activities must be below £150,000, and you must leave once it is more than £230,000. HMRC can cancel a certificate where it discovers that a false statement was made on the application. See our guide to HMRC VAT compliance checks.

How are subsidy, scheme and diversification income taxed?

HMRC’s manual says Basic Payment Scheme payments to a farmer carrying on farming are chargeable as revenue trade receipts. Delinked payments, paid as the Basic Payment Scheme is phased out, may be taxable as farming income, as income of a non farming trade or as miscellaneous income, depending on the recipient’s position. Our guide to environmental scheme payments for farmers covers the newer schemes.

Diversification adds more decisions. The furnished holiday lettings rules ceased to apply from 6 April 2025 for Income Tax and Capital Gains Tax, and from 1 April 2025 for Corporation Tax, so holiday cottages on a farm now sit under the ordinary property rules. Solar panel leases, contracting work for neighbours and farm shops each need to go in the right part of the return. Every one of these is a point HMRC can question.

Where does HMRC look for errors on farm returns?

HMRC’s error guidance and manuals point to these pressure points:

  • Capital allowances on machinery. The Annual Investment Allowance is £1 million, but it cannot be claimed on cars, and a partnership can only claim it where all the members are individuals. HMRC’s guidance on common errors says sole traders and partnerships must treat an owner’s personal use of an asset as non qualifying use, and that the allowance can only be claimed for the period in which the expenditure was incurred.
  • The farmhouse. HMRC’s manual says there is no statutory authority for claiming a fixed fraction of farmhouse costs and that business use is a question of fact and degree. See our farmhouse expenses guide.
  • Herd basis and stock. Because the election is irrevocable, an error in how it was set up can carry through many later years.
  • Averaging claims. The volatility test and the eligibility of the trade both need to be met, and contracting income can affect both.

Worried about an HMRC check?

Tax investigation insurance can pay your accountant’s fees for dealing with an HMRC enquiry, subject to the policy terms. Accountants can also offer fee protection to their clients. Call 01795 841 310 or send us your details and we will come back to you.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

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What happens in an HMRC enquiry into a farm or farming partnership?

For a Self Assessment return filed on time, HMRC has a full 12 months from the date it receives the return to open an enquiry. A farming partnership adds a layer. An enquiry into the partnership return must normally be opened within 12 months after the return was delivered, the nominated partner normally deals with it, and it is treated as also opening an enquiry into each partner’s personal return, limited to points relating to the partnership. HMRC needs a separate notice to look at anything else on a partner’s own return.

An enquiry can be an aspect enquiry into one item, such as the farmhouse or a machinery claim, or a full enquiry into the whole return. See aspect and full enquiries. Expect requests for bank statements, purchase invoices, herd records, scheme payment statements and evidence of private use of vehicles. Enquiries often run for many months, because seasonal work leaves little time for paperwork and each answer can prompt further questions.

What professional fees build up during an enquiry?

Your accountant charges for the time spent on the enquiry, whether or not HMRC finds anything wrong. On a farm that time usually goes on:

  • reviewing the opening letter and agreeing what HMRC is entitled to see
  • gathering and reconciling records, often across several years where averaging or the herd basis is involved
  • recalculating profits, allowances or averaging claims if HMRC challenges a figure
  • writing to HMRC, attending meetings and negotiating the outcome

What does tax investigation insurance cover for farmers, and what does it not?

Solar Protect tax investigation insurance pays your accountant’s professional fees if HMRC opens a check after the cover starts. It pays up to £100,000 of fees, with no excess. It responds to:

  • full and aspect enquiries into Income Tax and Corporation Tax returns
  • VAT compliance checks
  • PAYE and National Insurance reviews, which can arise where a farm employs staff
  • IR35 and employment status disputes
  • Schedule 36 information notices

It never pays tax, interest or penalties. Our page on what tax investigation insurance does not cover sets out the limits. Cover is subject to the policy terms.

What could this look like in practice?

Example. Three family members run a mixed dairy and arable farm as a partnership. HMRC opens an aspect enquiry into the partnership return, asking about allowances on a new tractor and a pickup and the share of farmhouse costs claimed. Because it is a partnership enquiry, each partner’s own return is also under enquiry on partnership points. Their accountant gathers invoices, vehicle logs and household bills and agrees a reduced claim for private use of the pickup. The policy pays the accountant’s fees for that work. The partners pay the extra tax and interest themselves.

Frequently asked questions

Can a farming partnership buy tax investigation insurance?

Yes. You can get an individual policy quoted online through our quote form. Cover is subject to the policy terms.

Will the policy pay the tax if HMRC disallows part of my farmhouse claim?

No. The policy pays your accountant’s professional fees for dealing with the check. It never pays tax, interest or penalties.

Does it cover a VAT compliance check on a farm?

Yes. VAT compliance checks are one of the types of HMRC check the cover responds to, alongside full and aspect enquiries into Income Tax and Corporation Tax returns.

Is the date HMRC opens the check important?

Yes. The policy pays fees where HMRC opens the check after the cover starts, so cover needs to be in place before a letter arrives.

Can I get cover through my accountant?

If your accountant runs a fee protection scheme, you can join through them. See our accountant scheme.

More on tax investigation insurance. Ready for a price? Ask for a quote or call 01795 841 310.

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 31 October 2026. Solar Protect is the trading name of Solar Insurance Services (Medway) Limited, authorised and regulated by the Financial Conduct Authority. This page is general information, not advice on your own cover.