Annual Investment Allowance spending reprieve

2020 has been a difficult year for all businesses, with COVID-19 restrictions meaning the closure of pubs, restaurants and the near wipe out of any large gatherings such as agricultural shows, weddings etc. This had led to many farmers being very concerned over the demand for their produce as much of this would be consumed at these locations/events. Due to several factors, including bad weather for winter sowing in 2019, many farmgate prices are in a much better position than they were in 2019 and this will lead to some businesses facing large tax liabilities in 2021.

With future subsidy levels being unknown, although we would expect them to be at a much lower level than they currently are, is now the right time to replace aging equipment and place your business on a forward footing? Whilst it is never a good idea to buy equipment if it is not needed, there will be tax advantages to those who need to update equipment.

The Government recently extended the temporary increase of the Annual Investment Allowance (AIA) until 1 January 2022. It had been due to revert to £200,000 at the end of 2020, but it will now remain at £1m for another year to help stimulate investment.

The AIA provides 100% tax relief on qualifying capital expenditure up to £1m in the year of purchase which can be used to invest in plant and machinery. It can potentially also be claimed on the construction of certain types of agricultural buildings that provide a function, such as a temporary grain store or a cold store.

It would be beneficial to consider effective tax planning for next year in order to maximise the full tax relief available before the limit is reduced and perhaps when there is additional pressure on cashflow. However, businesses with a year end that straddles 31 December 2021 should be aware that transitional rules apply which can have unexpected consequences.

If any expenditure is incurred in the period falling on or after 1 January 2022, once the AIA has reverted to £200,000, there will be a cap on the amount that can be claimed. This can result in you missing out on vital tax relief, so it is important that the timing of any capital expenditure is calculated in advance.

It’s worth noting that hire purchase can also be used to acquire assets, allowing the cost to be spread over several years but the same tax relief is available as if it had been acquired outright. Purchasing through HP can result in a cashflow boost in the short term, but consideration should be made based on the business’s other financial commitments as in later years, the hire purchase payments will still have to be made and no further tax relief is available.

With certain investments requiring planning permission, getting the timing right is critical as getting it wrong even by a day could prove costly. Any qualifying spend not covered by the AIA will be subject to writing down allowances at either 6% or 18% or the structures and buildings allowance of 2% (increasing to 3% from 1 April 2021).

It would be very worthwhile to sit down with your accountant/tax advisor and plan for your capital expenditure over the forthcoming year to ensure that you maximise the tax reliefs that are available.

If you’d like to discuss your circumstances, please get in touch with our EQ Agriculture team by calling one of our offices or by emailing agriculture@eqaccountants.co.uk.