Increased Annual Investment Allowance for 2019 – the stumbling blocks
For most agricultural businesses the key announcement of the 2018 Budget will not 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 £1m for the two years commencing 1st 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 was starting to show its age. However, there is always a catch – or in this case, a few of them, so careful planning is needed to prevent tripping over.
Firstly, although the relief starts on 1st January it will need to be apportioned over the businesses account period, so a business with a March year end will have maximum AIA of £400,000 for the year ending 31/3/19 (9/12 x £200,000 and 3/12 of £1m). Assuming the rate returns to £200,000 after the two years, 2019/20 will be a full £1m 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 that one also needs to consider the actual expenditure falling into each period. So, in 2018/9 up to £200,000 (the old limit) can be spent prior to December. Any amount spent in excess of this will simply be added to the pool. A further £200,000 could be spent and claimed between 1st January and 31st March. Assuming the AIA limit returns to £200,000 for 2021, a similar restriction will apply to expenditure after 1st January 2021 which will be capped at £50,000.
Thirdly, it is worth remembering some overall restrictions on AIA: mixed businesses (i.e. those with a corporate partner or another partnership as a partner) cannot claim, and 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. So, although a combine purchased on 31st March for £250,000 under an HP agreement would meet the AIA timing criteria, it is 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, Head of Agriculture & Rural Business, Sarah Dodds said “The increase in AIA is most welcome, and after some difficult years it will give operators the opportunity to replace or upgrade machinery with a tax treatment which matches their cashflow. The calculations can be quite complex however, and I would recommend taking professional advice before signing on the dotted line to ensure the relief can be claimed as expected”.