Plan ahead to capitalise on vital tax relief extension

Category: Agriculture - Posted On: Nov 19 2020

The Government recently extended the temporary increase of the Annual Investment Allowance (AIA) until 1 January 2022. It was 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. This can prove vital for agricultural businesses who spend substantial amounts on necessary agricultural machinery.  It can even be claimed on certain property additions where the use meets the plant and machinery criteria.

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 less pressure on cashflow. However, business 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 the 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 (HP) 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 other financial commitments as in later years, remaining HP 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%.

Our EQ Agriculture specialists can offer advice on how best to purchase assets and advise on the best time to incur this expenditure to ensure your farming business does not miss out on the tax relief available. Please get in touch with your usual EQ contact or alternatively you can email or call one of our offices.