Still time to take advantage of generous capital temporary tax allowance

07.09.2020
Chris Solt
Agriculture

Agricultural businesses considering a big capital investment have just four months to take advantage of a generous temporary tax allowance.

Most farmers will know that 31st December 2020 is a landmark date, as the withdrawal period comes to a close and the UK’s agricultural sector steps into the brave new Brexit world. 

But that date is important for another reason, because it marks the end of a two year window in which making big capital purchases has been much eased by government – and farm businesses have just four months left to take advantage. 

In the 2018 Budget, the Chancellor announced a temporary increase in the Annual Investment Allowance (AIA) from £200,000 to £1 million, running from 1st January 2019 to 31st December 2020.  This has allowed businesses to secure full tax relief on capital purchases in the trading year in which the investment is made – a significant cashflow benefit. 

It is unlikely that the Chancellor will be filling the Autumn budget with good news so, with just four months left before the AIA drops back to £200,000, anyone considering a major purchase needs to get both the timing and the method of purchase right to take full advantage. 

It is important to say that no-one should make a major capital investment decision solely on the basis of tax efficiency – business need has to be the number one factor.  But if you know that you will be making such a purchase, it makes sense to get it done before the 31st December deadline. 

And ‘getting it done’ is clearly defined by HMRC. Tax relief is generally available once a purchase becomes unconditional. However, many farming businesses make use of hire purchase, but for such an investment to be counted as having been made before the deadline, the asset must have been brought into use for it’s intended purpose before the year end in order for the full cost to qualify for AIA in the year of acquisition.  So if you were to place an order for a combine harvester on hire purchase in November, it’s unlikely to qualify, because it wouldn’t be used until harvest time next year. 

A way round this is to consider other methods of funding the purchase.  For example, if you were to take a loan to make the purchase, provided the purchase itself was completed before the deadline, it should qualify for full relief. 

Given that many dealers are probably experiencing a quiet time at the moment, it’s entirely possible that orders can still be placed and fulfilled before the end of the year – there may be both good deals to be had and stock availability right now. 

The rules for claiming AIA for businesses with accounting periods which straddle the 31st December deadline are complex, so taking advice on how and when to make that investment is vital.    

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