Shropshire Star

Farming Talk: Importance of timing when buying machinery

The considerable cost of buying agricultural machinery and equipment means careful planning is required to ensure any tax relief is available as soon as is possible.

Published

The Annual Investment Allowance provides an immediate deduction to many businesses for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit.

The maximum annual amount of the AIA was increased to £500,000 from April 1, 2014, for companies and from April 6, 2014, for unincorporated businesses, which finishes on December 31, 2015. George Osborne told us in the Summer Budget that the 'permanent' amount from January 1, 2016, will be £200,000, which is a big reduction from that given previously. What has also been confirmed are the transitional provisions to calculate the amount of AIA when an accounting period straddles the date of change.

A large percentage of farmers have a March 31 accounting year end which means two calculations need to be made to establish the relief available.

1. A calculation which sets the maximum AIA available to a business in an accounting period which straddles January 1, 2016.

2. A further calculation which limits the maximum AIA relief that will be available for expenditure incurred from January 1, 2016, to the end of that accounting period. It is the second figure that can catch a business out. For a business with a March 31 year end, under calculation 1 the business will be entitled to up to £425,000 of AIA (9/12 x £500,000 + 3/12 x £200,000). However for expenditure incurred on or after January 1 to March 31, 2016, the maximum amount of relief will only be £50,000 (3/12 x £200,000).

You will appreciate that if you are considering the purchase of plant and machinery in the near future, the timing of the transaction is extremely important. There are further factors to consider regarding the timing of the expenditure and in particular if the business is funding the cost by taking out finance and the credit period for payment after delivery exceeds four mont.

Please discuss the timing of any forthcoming capital additions with your agent for the most tax efficient way of making capital expenditure, especially given the reduced limits between January 1, 2016, and the end of the accounting period for your business.

David Morris is a member of Whittingham Riddell's specialist Rural Team.

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