2014-12-11  

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Plan Your Machinery Shopping Sprees to Bank £500,000 AIA

For all businesses, and agriculture is no exception, cash flow is the life-blood. However, due to the seasonality of farming and the time of year tax bills are due, it can cause a strain on many farming businesses.

Capital expenditure cannot generally be deducted against taxable income, but Capital Allowances may be claimed instead on plant and machinery. Unfortunately though you won't necessarily be able to claim all the expenditure on an asset in the accounting period when you bought it due to the complex rules surrounding Capital Allowances. Capital Allowances can help reduce your tax bills assisting with the renewal of ageing, inefficient and often high maintenance and unreliable equipment.

Sarah Dodds Head of Agriculture MHA MacIntyre Hudson

Sarah Dodds
Head of Agriculture, MHA MacIntyre Hudson

Plant and machinery are grouped into different pools and a deduction against your taxable profit is taken each year for the amount the pool is written down. The “main pool” (in which most farm machinery such as tractors and combines is allocated) is written down at a rate of 18% and the “special rate pool/ integral features” (into which some qualifying bits of agricultural buildings go) pool is written down at a rate of 8% (these are called writing down allowances (or WDAs)).

To help boost the cash flow and stimulate investment by businesses, the government introduced the Annual Investment Allowance (AIA), which allows most businesses (but not partnerships with a company or a trust as a partner) the advantage of accelerating the timing of tax relief by writing off 100% of expenditure up to an annual limit on plant and machinery (which includes van and double car pick-ups with a payload over 1 tonne but not cars) against taxable profits in the period in which the expenditure was actually incurred. When businesses spend more that the annual limit, it is only that additional expenditure over the AIA which enters the main rate or special rate pool to get tax relief over many years through the WDA.

Currently, AIA is available for the first £500,000 of expenditure on plant and machinery. This though was only a “temporary” increase and from 1 January 2016 it will revert to just £25,000 although this may change after the election in May 2015. Despite the change not happening until next year, careful planning needs to be done now due to the complex rules surrounding the AIA.

When the accounting period of a business does not coincide with the change in rate in AIA’s, the rules work in a strange way and timing is absolutely crucial to ensure you bank the maximum amount. These complex and rather silly rules are actually best illustrated with some examples.

Examples

Let us tax a farm which draws its accounts up to 30th April each year.

  • Any expenditure qualifying for Capital Allowance (excluding cars), up to £500,000 in the year ended 30 April 2015 should qualify for 100% tax relief.

  • It starts to gets difficult when we go into the next year after 30 April 2015. This is when we will then be affected by the change in AIA rate and the maximum AIA would be calculated as follows:

  • 1 May 2015 – 31 December 2015 = 8/12 x £500,000 = £333,333

  • 1 January 2016 – 30 April 2016 = 4/12 x £25,000 = £8,333

  • The maximum AIA for this transitional period would be £341,666. However, there is a very much more dramatic restriction which applies to any expenditure incurred between 1 January 2016 and 30 April 2016 as this will be limited to just £8,333.

  • This means if you have an April year end, you have to 30 April 2015 in which you can relief £500,000. Anything spent after this date until 1 January 2016; your relief will be restricted to £341,666. If you have not spent this amount before 31 December 2015 anything spent in the period in between 1 January 2016 – 30 April 2016 will be limited to £8,333.

Those using hire purchase (HP) to fund their plant and equipment need to be particularly careful about when the assets are brought into use. To qualify for the AIA, anything bought using HP must be brought into use in the accounting period in which it is to be claimed. There may be a time lag between purchase and first use in the business, especially on assets like combines, which are seasonal. This rule does not apply if you were to buy using a bank loan rather than HP, although there are also some other rules which may need to be considered involving when the expenditure was legally incurred.

If your combine is coming up to be renewed, it may be worth bringing it forward to this year – particularly if you tend to use HP to fund your acquisitions. On the above example if a combine is purchased by HP in January/ February 2015, it will be not be brought into use during the accounting period, so only the amount paid in the accounting period (deposit) will fall into the year ended 30 April 2015. When brought into use (Summer 2015), anything above the amount paid in 30 April 2015 will fall into the year ended 30 April 2016, which will have a total allowance of £341,666.

If you waited another season and purchased a combine in say October/November 2015, only the amount paid during that accounting period to 30 April 2016 will be available to claim AIA on. The combine won’t be brought into use until summer 2016, which falls into the accounting period 30 April 2017 and at the current moment in time only £25,000 AIA will be available on this amount, creating potentially a cash flow disadvantage.

Clearly the rules are a bit more generous if you do not use HP but you would still need to take great care.

It may make sense if expenditure is planned to be spent in the future to bring forward investment to use the higher allowances on offer in the current tax year.

But be careful do not let the tax tail wag the dog, there is no cash flow advantage buying plant and equipment just to reduce tax. However, if the spending is part of a planned and justified replacement, then the relief can be maximised to help the tax bill.

Given how expensive modern farm equipment has become, do sit down over next few weeks to consider your future capital expenditure plans, whilst the very generous £500,000 AIA is still around.

The calculations can be complex, and need to be looked at on a case by case basis so if you would like to discuss these changes, please do not hesitate to get in touch.

Macintyre Hudson

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