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‘Mars Adjustment’ on death of a sole trader

The farming business of a sole trader generally ceases on death. Likewise, where there is a farming partnership, if there is no clause in the Partnership Agreement about continuing the partnership, it must cease under s33 of the Partnership Act 1890. If there are tax and logistical advantages of the trade continuing then consideration should be given to ensure continuation. The trade is treated as continuing if the executors take over the trade (BIM80570). This is not the case if a beneficiary takes over the trade, therefore bringing the beneficiary in as a partner could be very useful.

What is the Mars adjustment for farmers?

The cases of Mars UK Ltd v Small [2007] STC 680 and William Grant & Sons Distillers Ltd v HMRC [2007] STC 680 considered the treatment of depreciation included in the value of stock held at the year end. Also whether the net depreciation charged to profit and loss account or the full depreciation charge was reflected in fixed assets in the balance sheet and should be added back in the companies’ corporation tax computations. The House of Lords concluded it should be the net amount that is added back. When the stock is sold in a subsequent period of account, the depreciation element of that stock would be added back in the computations for that period. This is known as the “Mars adjustment”.

In order to understand the principle it is worth noting what Lord Hope of Craighead had to say with regard to accounting principles in the Mars and William Grant Distillers cases, [2007] UKHL 15:

“It has to be recognised that accounting principles have moved on since 1961. What may have been regarded as unacceptable then need not be regarded as unacceptable now. The golden rule is that the profits of a trading company must be computed in accordance with currently accepted accounting principles. They are the best guide as to a true and fair view of the profit or loss of the company in the relevant accounting period. Profits so computed are subject to any adjustment required or authorised by law in computing those profits for corporation tax purposes. But there is no rule of law that prohibits effect being given to what currently accepted accounting principles provide as to how a true and fair view is to be arrived at, or as to how depreciation should be treated when profit or loss for the year is being calculated.”

“When depreciation is to taken into account to show a true and fair view of the profit or loss for each financial year is in the end a question of timing. If, in order to show a true and fair view according to currently accepted accounting principles, part of the depreciation has in fact been carried forward, that must be treated as fact. This has two consequences. The first is that depreciation does not cease to be depreciation when it is carried forward as part of the carrying amount of stock into another accounting period. It retains its character, just like any other element of cost that is carried forward, as an expense to be set off against income in the year when the stock is sold. The second is that the amount of depreciation to be added back is the net amount. This is because only the net amount will have been deducted in computing the amount of the profits for the relevant period.”

In order for a correct valuation of stocks of items being produced, eg Mars Bars, Whiskey and corn on the farm, there has to be an element of indirect cost. Such an inclusion invariably includes depreciation, eg the machinery for production, tractors and combines.

As mentioned, the “Mars adjustment” is when the farmer’s stock valuation calculation contains an element of depreciation which, as a result of the write down in stock, has been released to profit and loss. Assuming depreciation was included in the original stock valuation, the question is how much of that depreciation has been released as part of the write down. Clearly, elements that make up a stock valuation cannot be identified separately in the context of a write down, so it would seem reasonable to pro-rate the total write down to identify the depreciation element which needs to be added back in the tax computations. It would be appropriate to indicate in the computations the methodology adopted with regard to this add-back.

The importance of the Mars adjustment for arable farmers is that depreciation is generally included in the stock in the balance sheet and needs to be adjusted at the year end. Likewise it needs to be adjusted in the opening period and reversed out in the next accounting period. Such an adjustment is beneficial in reducing the taxable profits in the same way as it was in the Mars case. If the trade is taken on by the executor then the trade continues and the Mars position does not unravel on death. There is also no deemed disposal of capital equipment from the deceased to the executors.

The impact of potential cessation must be considered with regard to farmers at every level. They normally “die with their boots on” so the cessation impact is important for overall succession planning. With a large number of farmers being in their 60s, 70s and 80s the need to allow for tax planning around cessation on death is important. The continuation of the partnership should be covered by the Partnership Agreement.

Reproduced by kind permission of LawSkills Ltd from their website ( A site dedicated to helping Private Client Practitioners.

By Julie Butler, Butler & Co

Posted March 8, 2019 in Tax

Disclaimer: LawSkills provides training for the legal industry and does not provide legal advice to members of the public. For help or guidance please seek the services of a qualified practitioner.


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Butler & Co, Bennett House, The Dean, Alresford, Hampshire SO24 9BH

Butler & Co is the trading name of Butler & Co Alresford Limited registered in England (Company No. 10726923) and is regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales.
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