Tax relief on equipment spending to be slashed in 2021

Farmers will not be able to offset as much equipment expenditure against tax from the new year, accountants have warned.

The annual investment allowance (AIA) allows businesses to set off the full value of qualifying items from their profit before tax.

The maximum deductible amount for this calendar year is £1m, but this is set to fall to £200,000 on 1 January 2021, says Martin Dobinson from accountancy and advice firm Saffery Champness.

See also: Warning over correct tractor values for insurance cover

Qualifying items for farms typically include:

  • Vehicles such as vans, lorries, tractors, combine harvesters
  • “Integral features” of buildings and structures such as space/water heating systems, air conditioning systems, hot/cold water systems and electrical systems/lighting
  • Storage tanks and slurry storage systems
  • IT and robotic systems
  • Wind turbines.

The lower limit would see more than half of next year’s allowance wiped out by the purchase of one 180-220hp tractor, which is forecast to cost £108,938-£143,850 based on the 2021 edition of the John Nix Pocketbook.

It notes that machinery of all types have increased in price by an average of 6% in the past four years, with tractor prices forecast to increase another 5% in 2021. It says machinery price inflation is one of the industry’s biggest input cost challenges.

What happens if a business’ trading year runs across two calendar years?

Farm businesses that have an accounting period straddling the transitional date of 1 January 2021 must apportion between the £1m annual limit applying before 1 January, and the reduced £200,000 annual limit applying from 1 January, said Mr Dobinson.

“For businesses planning substantial qualifying capital expenditure in the near future, they may wish to bring this forward to ensure that the maximum AIA is available and that tax relief for the expenditure is accelerated,” he said.

“Timing of the expenditure for capital allowances needs careful consideration.

“Generally, the expenditure is deemed incurred when the obligation to pay becomes unconditional – usually on delivery,” he said.

However, there are exclusions to this rule which should be discussed with a professional adviser, he added.

Example capital allowance calculation

A farmer has an accounting period from 1 April 2020 to 31 March 2021. The maximum AIA available is derived as follows:

1) For the period from 1 April 2020 to 31 December 2020, 275/366 days x £1m = £751,366; and

2) For the period from 1 January 2021 to 31 March 2021, 90/365 days x £200,000 = £49,315.

Therefore, a maximum AIA of £800,681 is available for the 12-month period.

However, there is a further restriction that should be noted. Expenditure qualifying for the AIA, incurred in the three-month period from 1 January 2021 to 31 March 2021, is restricted to the £49,315 figure.

Source: Saffery Champness

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