Increased Annual Investment Allowance: the stumbling blocks
Friday, 13 December 2019
For most farms and agriculture businesses, the key announcement of the 2018 Budget wasn’t the change in personal tax rates or allowances (welcome as they were), 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, the increase in AIA was likely most welcome and is 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 started on 1 January, it needs to be apportioned over the business’s account period. So, a business with a March year end will have had 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 AIA 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) could have been spent prior to December. Any amount spent on top of this would simply have been added to the pool. A further £200,000 could have been 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 2019 for £250,000 under an HP agreement would have met the AIA timing criteria, it wouldn’t have been brought into use for some months, so CAs on the credit instalments wouldn’t have been available until 2019/20. This restriction wouldn’t apply if it were simply purchased on the overdraft and it doesn’t apply to any deposit paid. Therefore, the timing of when an HP asset is brought into use is important.
Commenting on the changes, MHA Larking Gowen agriculture Partner, Steven Rudd, says, “The increase in AIA is welcome, and after some difficult years it l allows 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 MHA Larking Gowen contact.
Call 0330 024 0888 or email firstname.lastname@example.org.
Originally written on behalf of MHA Monahans, a member of MHA