Benefitting from the enhanced Annual Investment Allowances
Many agricultural engineering companies have been pleasantly surprised by the level of enquiries placed for farm machinery in the opening weeks of the year, most noticeably as seen at the recent LAMMA trade show. This comes at a challenging time for many farmers when it might be thought that further investment would be far from mind. We identify two main reasons: the first being that farmers have seen they must keep their machinery fleet appropriate to cope with any conditions and the second is quite simply valuable tax incentives.
The Chancellor announced in his Autumn Statement a two year Annual Investment Allowance (AIA) of £250,000 (a ten-fold increase). This move was designed to stimulate the wider economy but provides a very attractive incentive for farmers wishing to manage any tax bill. Not only that but by utilising hire purchase a significant improvement for cash flow can be accessed at a time when this is becoming a serious consideration for many.
The benefit of an AIA is to accelerate the timing of the tax relief by providing 100% tax relief for qualifying capital expenditure in the accounting period in which the expenditure is actually incurred. Annual expenditure above the first £250,000 will attract the usual 18% annual Writing Down Allowance in the first year with the balance going in to the pool of allowances for subsequent years. Under normal circumstances it can take up to 12 years to write off 90% of a machine’s cost against tax.
The AIA applies to the majority of businesses. Unincorporated businesses, such as many farmers operating as sole traders or partnerships, could face paying 40% or more in income tax. For incorporated businesses the rates of corporation tax are falling; acting promptly may generate higher tax relief before the top rate of 24% falls to 21% from April 2014.
Timing of expenditure is crucial for tax planning and there will be an incentive for some profitable businesses to claim relief in the current accounting period or lose that proportion of their entitlement entirely. However, the timing of the impact does depend on the particular accounting year and is complex. In an attempt to illustrate in simple form we attach a paper produced in conjunction with JCB Finance which gives both example cases and an easy to follow chart.
Farmers would be well advised to closely examine the merits of this opportunity and the evidence is that some already are doing so.
The Agricultural Engineers Association does not operate as a tax or financial advisor - always seek professional advice.
Contact: Chris Evans firstname.lastname@example.org
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