Annual Investment allowance doubled – but use it wisely

Published 3 April 14

The newly increased annual investment allowance (AIA) is one of the best opportunities for farm businesses to reduce tax – but careful planning is needed to get the best from it.

If farmers were pleased at the 10-fold increase in the AIA limit last January, they’d have been surprised to see the £250,000 limit double, with effect from the start of the new tax year in the latest budget announcement. This was against many predictions.

According to Rob Hitch of Dodd & Co Chartered Accountants, the AIA is effectively a 100 per cent up-front allowance that applies to qualifying expenditure – investment in plant and machinery – in the year of purchase. 

But, he stresses, it’s important to look at what you apply your allowance to. “If you are planning to use your allowance to write off a capital purchase such as a tractor, which you intend to trade in three years later, you could end up paying tax on the income from that tractor sale. While the cashflow advantage of the relief on machinery purchases can be attractive, you should be aware that if all the relief is claimed when purchased, any sale will give rise to a tax charge. In fact, many businesses find themselves in this position already. If this is the case, then the relief available will not equate to 100%” he explains.

“So the best way to use the allowance is to apply it to structural investments that will have longevity and don’t tend to get traded in – for example, new cubicles, silage clamps, milking parlours or slurry storage/handling equipment.

Mr Hitch says that the relief will mean a company with £500,000 of taxable profit, spending £500,000 on plant and machinery, will reduce its tax bill by £102,500. For a sole trader making £500,000 before allowances, the same level of expenditure could save anything up to £223,341 due to the higher Tax and National Insurance charges.

“It should also be noted that if your accounting year straddles the 31 March 2014, the maximum AIA allowance will not be £500,000, as the allowance is pro-rated. For a company with a year end of 31 December 2014, the maximum AIA would be £437,500 (ie 3/12 x £250,000 plus 9/12 x £500,000).”

He says a further point to note is the importance of the timing of any purchases. Although the maximum AIA as detailed in this case would be £437,500, any expenditure in the period before April 2014 would be limited to £250,000 (ie, as if the increase to AIA did not take place). Mr Hitch says you can, however, obtain the maximum AIA on any expenditure in the period post April 2014.

“And when the AIA limit decreases back to £25,000 in January 2016, the timing of expenditure is even more important. For example, if a company had a 31 March 2016 year end, the maximum AIA for the period would be £381,250 (9/12 x £500,000 plus 3/12 x £25,000).

“A last word of warning is that the annual investment allowance is mainly intended to bring forward investment and at some stage there is a real chance that they will be reduced – the latest rate expires on 31 December 2015 – putting a number of businesses back into a higher tax bracket, so forward planning is needed to avoid unexpected tax liabilities.”