100% of the cost of qualifying plant and machinery expenditure, up to the specified annual limit, can be claimed upfront for tax purposes under the Annual Investment Allowance (AIA).
Qualifying expenditure for farming and other rural businesses may typically include vehicles (such as vans, lorries, tractors, combine harvesters); ‘integral features’ of buildings and structures (such as space/water heating systems, air conditioning systems, hot/cold water systems and electrical systems/lighting); storage tanks and slurry storage systems; IT and robotic systems; and wind turbines.
Saffery Champness is advising that the AIA limit will reduce from £1 million to £200,000 with effect from 1 January 2021.
Martyn Dobinson, a partner at Saffery Champness and a member of the firm’s Landed Estates and Rural Business Group, comments:
“Where a farm or estate business has an accounting period straddling the transitional date of 1 January 2021, then the limit must be apportioned accordingly between the £1million annual limit applying before 1 January, and the reduced £200,000 annual limit applying from 1 January.
“For businesses planning substantial qualifying capital expenditure in the near future, they may wish to bring this forward to ensure that the maximum AIA is available and that tax relief for the expenditure is accelerated.
“Of course, such planning should also take into account other factors, not least this year, the effect of Covid-19 on cash flow.
“Timing of the expenditure for capital allowances needs careful consideration. Generally, the expenditure is deemed incurred when the obligation to pay becomes unconditional – usually on delivery. There are, however, exclusions to this rule which should be discussed with your professional adviser.”
A farmer has an accounting period from 1 April 2020 to 31 March 2021. The maximum AIA available is derived as follows:
1) For the period from 1 April 2020 to 31 December 2020, 275/366 days x £1 million = £751,366; and
2) For the period from 1 January 2021 to 31 March 2021, 90/365 days x £200,000 = £49,315.
A maximum AIA of £800,681 is available for the 12-month period.
However, there is a further restriction that should be noted. Expenditure qualifying for the AIA, incurred in the 3-month period from 1 January 2021 to 31 March 2021, is restricted to the £49,315 figure.
If the farmer spends £100,000 on new qualifying assets during the year to 31 March 2021, and that expenditure is incurred before 1 January 2021, then the AIA can be claimed for the full £100,000 spent.
However, if that expenditure is incurred after 31 December 2020, then the AIA can only be claimed on £49,315. The remaining £50,685 would be eligible for tax relief under the standard writing down allowances of 18% or 6% on a reducing balance basis – a significant deferral of the tax relief available and potential adverse cashflow impact.
For accounting periods of less than 1 year, the available AIA is adjusted accordingly.