Government proposes capital tax allowances shake-up

More generous capital allowances could be on the cards for farm businesses amid a government review.

A consultation by HM Treasury is considering making the temporary increase in the annual investment allowance (AIA) permanent.

This system currently allows businesses to claim up to £1m in same-year tax relief for capital investment in plant and machinery.

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The level had increased from £200,000/year to £1m/year between 1 January 2019 and 31 March 2023 to encourage investment, but an increase could be made permanent, although it may not be as high as the current £1m.

The government is also considering permanent full expensing, allowing all qualifying expenditure to be written off in the year the expenditure is incurred, and for that amount to be uncapped.

The consultation on capital allowances was announced in the government’s recent Spring Statement.

It has now released a paper aiming to “kickstart a conversation with businesses” on proposed changes to the UK’s capital allowances regime.

Accountant Martyn Dobinson, a partner at Saffery Champness, says the consultation is as relevant to agriculture as any other sector.

“The availability and extent of capital allowances can be a major influencing factor for rural businesses of all sizes in the purchase of farm machinery, plant, and other ‘big-ticket’ items,’’ he says.

Kit tax reliefs

Other options in the consultation that will influence decision-making in the agri-sector is a proposal to introduce general first-year allowances (FYAs) for qualifying expenditure on plant and machinery from 1 April 2023.

FYAs allow businesses to deduct a percentage of qualifying expenditure in the year it is incurred.

A possibility under consideration is to introduce general FYAs for qualifying expenditure on plant and machinery – this could be at 40% for expenditure on main rate and a 13% FYA for money spent on special-rate plant and machinery.

The government is also looking at introducing an additional FYA, above the initial cost of the asset, to allow a percentage of qualifying expenditure to be claimed in the year it is incurred, while 100% of that expenditure would still be available to be pooled with writing-down allowances (WDAs) claimed in the normal way.

WDA rates for main assets, a system that allows businesses to spread tax relief over multiple years, could also rise from 18% to 20%, and special rate assets from 6% to 8%.

The consultation closes on 1 July 2022. More information, including how to respond, can be found on the gov.uk website.