Beware rushing machinery purchases for tax incentives

Farmers are being advised against rushing decisions on new machinery purchases solely to beat a 2022 tax relief deadline.

Government tax incentives designed to stimulate spending are in part responsible for a recent surge in tractor sales.

Farmers have until 1 January 2022 to claim up to £1m in same-year tax relief through the Annual Investment Allowance (AIA) for capital investment in machinery and plant. After this deadline, the allowance will reduce to £200,000.

See also: Tractor sales recovery continues – but long delivery times

There is also a ‘super deduction’ incentive in place until 31 March 2023, which allows companies a reduction in their tax bills for every pound invested in new equipment.

But James Treverton, of rural insurance broker Lycetts, has warned farmers against making hasty purchasing decisions based on tax incentives alone.

“While this will make expenditure more attractive, it is important that farmers take stock, to thoroughly plan purchases, including cost-effectiveness based on farm output projections, and to have a farm investment strategy in place before coming to any concrete conclusions,’’ he said.

Mr Treverton recommends that farmers conduct a full audit of their machinery, taking into consideration predicted value, depreciation, remaining interest, machinery condition, suitability for operations, and running costs.

They also need a clear idea of how vehicles and potential investments fit within their yearly budget.

“Dated machinery may not be as effective and have higher running and maintenance costs, but new machinery involves significant upfront costs that eat into often stretched income,’’ said Mr Treverton.

Pre-pandemic figures put average gross expenditure on machinery at £36,200/farm.

“Farmers are already feeling the financial squeeze and it is a fine balancing act between getting full use out of current machinery and making a valuable and timely investment that can help boost productivity,’’ said Mr Treverton.

Don’t get taxed twice

Farm businesses may face higher-than-expected tax bills amid plans to introduce changes to how profits are allocated to tax years.

As part of the phased introduction of Making Tax Digital (MTD), HMRC wants partnerships and sole traders to apportion profits and losses from different accounting periods to align with the tax year.

This system, known as Basis Period Reform, could initially result in a double tax charge for some businesses, warned Gary Markham, director of farms and estates at Land Family Business.

HMRC’s preference is for businesses to prepare accounts to 31 March or 5 April each year.

The proposed start date for transition is April 2022, although accountancy bodies are lobbying for a delay.

However, every farm business will eventually have to report their profits quarterly.

“I urge every farming business to contact their accountant urgently to discuss the impact on their tax bills in case the changes go ahead as proposed,’’ said Mr Markham.

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Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

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