Changes to the Annual Investment Allowances announced in the recent Budget could provide a useful tax saving for mixed partnership businesses, says Grant Thornton's director of agriculture, Gary Markham.
The changes allow mixed partnership businesses - where at least one of the partners is a company or a trust - to claim 40% first-year allowances on new and second-hand plant and equipment bought since 6 April.
Until this year they could only claim 20% writing-down allowance each year on a reducing balance basis. Now they have 40% allowance in year one, with 20% in following years, like other businesses.
While most family farming partnerships were made up of individuals, about 25% of labour and machinery syndicates or joint ventures were mixed partnerships, Mr Markham said.
The changes could save a typical 1214ha (3000-acre) mixed partnership, where one member was a company, about £4000 at current tax rates over three years, he suggested. It also rapidly accelerated the speed of tax relief in the first year, which would be an important consideration for many businesses, he added.
"There is a greater tax saving in year one, but the difference between the new and old regimes reduces as time goes by. So the difference between the two regimes is speed of tax relief rather than the amount of the tax relief."
Those using hire-purchase agreements are reminded that new equipment must be brought into use before the financial year ends to qualify for the new 40% investment allowance.
Example - impact of 2009 Budget tax change for mixed partnerships
- A syndicate would typically have around £469/ha (£190/acre) invested in machinery
- This would be reducing in value at around 18% per annum or £84/ha (£34/acre)
- Typical size would be 1214ha (3,000 acres)
- This would give average £570,000 investment with £102,000 spent/year on replacement to maintain this value
- For example, assume a syndicate of one partnership and one company with equal shares
- Tax rate of 40% for partnership and 21% for company - average tax rate of 30.5%
Under previous allowance regime, tax relief on £102,000 annual investment would have given a total tax saving as follows:
- Year 1 allowance £20,400, reducing tax paid (at 30.5%) by £6,222
- Year 2 allowance £16,320, reducing tax paid (at 30.5%) by £4,978
- Year 3 allowance £13,056, reducing tax paid (at 30.5%) by £3,982
- Total tax saved by use of allowance over three years is £15,182
- Under new regime total tax saving is as follows:
- Year 1 allowance £40,800, reducing tax paid (at 30.5%) by £12,444
- Year 2 allowance £12,240, reducing tax paid (at 30.5%) by £3,733
- Year 3 allowance £9,792, reducing tax paid (at 30.5%) by £2,987
- Total tax saved by use of allowance over three year period is £19,164