Date10 Dec 2021
We all know that the cost of investing in plant and machinery, vans, cars and buildings is not deductible against the farm income before the profits or losses of the business are calculated and that the depreciation on these assets included in the accounts is not allowed as a deduction for tax purposes. Instead, capital allowances may be available to give tax relief on these assets.
One of the main announcements in the March 2021 budget was the introduction of the ‘super-deduction’ which gives a 130% super-deduction capital allowance on qualifying plant and machinery for a temporary period from 1 April 2021 to 31 March 2023. This includes most new qualifying plant and machinery investments not fixed to a building.
For example, a company incurring expenditure of £100,000 on a new tractor will mean the company can deduct £130,000 from its taxable profits thus saving the company up to 19% of £130,000 on its corporation tax bill – a tax saving of £24,700.
First year special rate allowance
A first year allowance has also been introduced where capital allowances of 50% are available on plant and machinery which ordinarily qualifies for capital allowances at 6%. This includes qualifying integral features fixed to a building including water systems, electrical systems and air conditioning. This allowance is also only available for qualifying items purchased in a temporary period between 1 April 2021 to 31 March 2023.
For example, a company incurring £50,000 on electrical and water systems in a new building can deduct £25,000 from its taxable profits thus saving the company up to 19% of £25,000 on its corporation tax bill – a tax saving of £4,750.
It is important to note that the super deduction and the first year special rate allowances are only available to limited companies and are not available to unincorporated businesses including sole traders, partnerships and LLP’s. Another restriction is that the asset must be new and unused. There are also a number of asset types that are excluded from the new enhanced capital allowances, including cars and assets for the purposes of leasing.
You need to be aware that there are provisions to claw back enhanced allowances previously claimed when qualifying assets are disposed of via a balancing charge. This is a major change to the capital allowance regime, as balancing charges would normally only apply to the disposal of an asset in the main asset pool or special rate asset pools where either the sale proceeds exceed the overall tax written down value in the pool in question or there is a cessation of the qualifying activity. However, under these new rules, balancing charges will arise on every future disposal of assets where either the super-deduction or the 50% first year special rate allowance has been claimed. If the balancing charge relates to a super-deduction asset, and that asset is disposed in an accounting period beginning before 1 April 2023, then the balancing charge is enhanced.
Annual Investment allowance (AIA)
The AIA is one of the most important capital allowances and provides 100% tax relief on the purchase price of qualifying capital equipment for use in a business up to an annual limit. This limit is £1,000,000 up to 31 March 2023.
For example, a partnership incurring expenditure of £80,000 on a second hand tractor will mean the partnership can deduct £80,000 from its taxable profits potentially saving tax and national insurance at higher rates of 43% - a tax saving of £34,400 for a higher rate taxpayer.
This remains an important allowance and is available to unincorporated businesses as well as limited companies. It can also be claimed on second hand assets as well as new assets and assets for the purposes of leasing. Integral features including water and electrical systems in a building can also be eligible for 100% AIA.
Certain restrictions apply when it comes to claiming AIA in that certain assets are excluded such as cars and the purchase of an asset on hire purchase where the asset is not brought into use before the end of the accounting period or does not have an option to purchase.
On a subsequent sale of the asset on which AIA has been claimed, the proceeds of sale are deducted from the tax pool rather than a balancing charge applying to this particular asset. A balancing charge may occur, if the disposal proceeds are greater than the tax pool.
Care must be taken on the timing of purchases in accounting years when the AIA limit changes as the overall maximum AIA needs to be calculated on a pro rata basis.
Writing down allowances (WDA)
Writing down allowances can be claimed where expenditure exceeds the AIA or where expenditure doesn’t qualify for AIA, for example, cars. The rate of writing down allowances is either 18% for qualifying main pool assets or 6% for qualifying items which fall into the special rate category. Typically, plant and machinery, including vans, qualify for 18% WDA’s (main pool) and cars qualify for 6% WDA’s (special rate pool).
Structures and Buildings allowance (SBA)
Following the abolition of the Agricultural Buildings Allowance some years ago, a Structures and Buildings Allowance (SBA) was introduced for qualifying expenditure on or after 29 October 2018. Expenditure on constructing or renovating non-residential buildings and structures used in the trade may qualify for the SBA. The allowance is 3% of the cost from April 2020 on a straight line basis having increased from 2%. Following the rate increase, the additional 1% can be claimed for the period from 29 October 2018 to 31 March 2020 or 5 April 2020 depending on whether the business is incorporated or unincorporated. The structure or building must be used in a qualifying activity and the claimant must have a freehold or leasehold interest in the land on which the asset is constructed. Claims are restricted to the lower of the actual expenditure or the market value.
For example, a partnership built a cattle court costing £200,000. The contract was entered into in May 2021 and the building was completed in September 2021 and you start to use it in your farming business in November 2021. Your accounts are prepared for each year to 31 December. In the year ended 31 December 2022, assuming the £200,000 relates only to the building, you can claim tax relief at 3% on the £200,000 being £6,000, potentially saving tax and national insurance at higher rates of 43% - tax saving of £2,580 for a higher rate taxpayer.
Care should be taken to check if the higher rate of plant and machinery allowances can be claimed on certain buildings, for example grain drying facilities or whether integral features rates can be claimed on electrical or water systems before considering if the SBA can be claimed.