The announcement in the Chancellor's Autumn statement that Annual Investment Allowance (AIA) for expenditure on Plant and Machinery will increase to £250,000 per annum for the two years from 1 January has created a lot of interest. There are no doubt a lot of machinery salesmen licking their lips in anticipation of potential sales to be made in the New Year, and also many farmers already making out their list of equipment that has suddenly become essential for next year. The Allowance was £100,000 until 31 March and then reduced to £25,000, before the latest announcement.
Before heading for the January sales with cheque books in hand, farmers and other businessmen and women need to make sure that they do not spend in haste, and regret this when they then speak to their tax adviser. Despite the Chancellor stating that this would be available to all businesses whether paying income tax or corporation tax, this is not the case and potential purchasers of equipment are advised to check that their business structure is one that qualifies for Annual Investment Allowance. For instance some Partnerships will not qualify, particularly if they have a company or Trust as one of the partners. If this is the case then if substantial investment is planned, some thought may need to be given to the structure to ensure it is the correct one, and if so plans for expenditure may need to change.
Businesses also need to be very careful about the timing of expenditure on new (or second hand) equipment. Even though the AIA is available from 1 January, the actual amount available to the business will depend on the accounts year end. If the year end is 31 December then the full AIA will be available in the year to 31 December 2013, so spending could start on 1 January, if you can find a dealer willing to sell on that date. However if the accounting year end is 28th February then in the accounting period to 28th February 2013 the available AIA was one month at £100,000 per annum (£8,333), 9 months at £25,000 per annum (£18,750), and the last 2 months at £250,000 (£41,667) per annum, a total of £68,750 for the year. The expenditure must also fall in to the correct months of the year to qualify, so if the total of £68,750 was all spent in the part of the accounting year before 31 December not all of this would qualify for AIA. The calculations of what amount qualifies are made complicated by two changes of AIA maximum investment within the twelve month period. No wonder tax legislation is complicated with so many u-turns to accommodate within the Taxes Acts!!
What is apparent from this announcement is that before making plans to spend what are hopefully some good profits in some sectors of the farming industry, farmers should check carefully with their tax advisors what is the best for their business. If there is a plan for capital expenditure for the forthcoming year or two then this will help decide on the correct timing of purchase to ensure maximum use is made of tax reliefs available.
Alan Tucker Partner EQ Accountants LLP
18 December 2012