Capital allowances always form a key part of tax planning considerations for any business, particularly in agriculture, what with the significant price tag that most machinery carries. Businesses have fortunately been able to benefit from the temporary increase to the Annual Investment Allowance (AIA) of £1,000,000 that was announced in the October 2018 Budget.
The initial period was 2 years from 1 January 2019, but the Chancellor extended this to 31 December 2021 at which point the AIA limit is set to decrease to the previous level of £200,000, unless of course the Chancellor decides to extend again!
Many agricultural businesses do not have a 31 December year-end which leads to complications in calculating the amount of AIA available for use where the AIA limit changes during a financial year. On the assumption that the limit does indeed decrease to £200,000, for a year end of 31 March 2022, the total AIA available will be approximately £800,000. However, as with all things tax related, timing is key; in this case only £50,000 of AIA is available for qualifying purchases that occur in the period 1 January to 31 March 2022.
Therefore, if a business is planning on purchasing expensive equipment in the near future, it may be more tax beneficial to purchase before the end of the calendar year. Unfortunately, the supply of new equipment has been somewhat stalled by various issues in the UK and around the globe; the supply chain has been struggling to keep up with demand and the lead times on equipment have been and continue to be significant. However, unlike the “super-deduction” capital allowance, equipment does not need to be new and unused to qualify for AIA. The high lead times on new equipment have unsurprisingly resulted in a general increase in the value of used equipment, so consider carefully whether the tax advantage will be outweighed by the premium that may be payable to obtain equipment by the end of the calendar year.
Always remember that business decisions should not be made based solely on the tax advantages that those choices may yield, especially if the course of action puts the business under cashflow strain.