Increased Annual Investment Allowance for 2019: the stumbling blocks
Monday, 03 December 2018
For most farms and agriculture businesses, the key announcement of the 2018 Budget won’t be the change in personal tax rates or allowances (welcome as they are), but the increase in Annual Investment Allowance (AIA) from £200,000 to £1 million for the two years commencing 1 January 2019.
For arable farmers in particular, who may have held back from capital expenditure in recent years of poor pricing and profitability, this could be most welcome and give an opportunity to replace some kit which is starting to show its age. However, there’s always a catch or, in this case, a few of them, so plan carefully to avoid tripping over.
Firstly, although the relief starts on 1 January, it will need to be apportioned over the business’s account period. So, a business with a March year end will have maximum AIA of £400,000 for the year ending 31 March 2019 (9/12 x £200,000 and 3/12 of £1 million). Assuming the rate returns to £200,000 after the two years, 2019/20 will be a full £1 million, and in the following year there will be a similar calculation for 2020/21 and the maximum will be £800,000.
The second stumbling point is the actual expenditure falling into each period. So, in 2018/19, up to £200,000 (the old limit) can be spent prior to December. Any amount spent on top of this will simply be added to the pool. A further £200,000 could be spent and claimed between 1 January and 31 March. Assuming the AIA limit returns to £200,000 for 2021, a similar restriction will apply to expenditure after 1 January 2021, which will be capped at £50,000.
Thirdly, it’s worth remembering some overall restrictions on AIA. Mixed businesses (i.e. those with a corporate partner or another partnership as a partner) cannot claim. Where multiple businesses, in similar trades and under common control, operate from the same site, or there are multiple companies under common control, a single allowance will normally be divided between them.
Finally, there is the perennial stumbling block of purchasing assets under hire purchase arrangements. Where a capital asset is purchased on long term credit, capital allowances (CAs) on the proportion of the expenditure subject to credit can only be claimed when the asset is brought into use. Although a ‘combine’ purchased on 31 March for £250,000 under an HP agreement would meet the AIA timing criteria, it’s not going to be brought into use for some months, so CAs on the credit instalments would not be available until 2019/20. This restriction would not apply if it were simply purchased on the overdraft and it does not apply to any deposit paid. Therefore, the timing of when an HP asset is brought into use is important.
Commenting on the changes, Larking Gowen agriculture Partner, Steven Rudd, says, “The increase in AIA is welcome, and after some difficult years it will allow businesses to replace or upgrade machinery with a tax treatment which matches their cash flow. The calculations can be complex though, and I recommend taking professional advice before signing on the dotted line to make sure the relief can be claimed as expected.”
For more information on how we can help, please speak to your usual Larking Gowen contact.
Call 0330 024 0888 or email email@example.com.
Originally written on behalf of Monahans, a member of MHA