How to make tax-efficient investments in dairy technology

The coalition government’s tax regime was relatively benign when it came to tax relief for farm investment. The annual investment allowance (AIA) was increased from £25,000 to £500,000 a year, encouraging many farmers to plough much-needed capital into their dairy units. But with the change of government comes a likely reduction in the AIA, so anyone considering buying machinery or equipment may want to act fast.

See also: What farmers need to know about Conservative tax plans

A key rule of accounting is not to let the tax tail wag the dog: Any capital expenditure must be made for the right farming reasons, not simply to save tax.

So how should farmers go about drawing up an investment plan? As a farmer myself, I would recommend going round the farm and identifying a list of priorities – what needs to be replaced now, what can wait a year or two, and what is on the long-term wishlist?

Mark Seager
Manager accountant
Old Mill

You then need to consider what finance is available, and the cost-benefits of the different options, whether that is different types of technology, comparing new with second-hand, or even selling some equipment and using a contractor.

When replacing equipment, it is worth looking at how much you are spending on repairs, and how much labour you will save with newer technology.

You should also consider adopting energy-saving technology to reduce daily running costs – but always be aware of the practical implications of any changes. For example, replacing straw bedding with green manure can dramatically cut bedding costs, but will it have a negative effect on mastitis and productivity.

When working out a budget, you should look at the figures over the projected lifespan of the equipment. What is the likely payback period, and can you afford the finance? If you are installing robots, they may have a lifespan longer than 10 years, but it may be better to replace them then as technology will have moved on apace.

See also: Guide on using annual investment allowance

In a lot of cases, tractors are bought in a three- to five-year replacement cycle, with parlour equipment budgeted over 15 years and silage clamps and buildings over 20-25 years.

However, depreciation is rarely taken down to a zero value. Typically a tractor will be written down at a reducing balance of 15-20% a year, to reflect the likely resale value at any point.

Having decided what investment is needed, you should then consider how to do it in the most tax-efficient way. The AIA is set to fall from £500,000 to an as yet unknown level on 1 January 2016. So it may be worth bringing eligible purchases forward to make the most of the remaining allowance.

The amount of AIA available will depend on a farmer’s business year-end, as it reduces proportionally according to the months left in the calendar year.

So to make full use of the tax relief, a business with a September 2015 year-end should claim the full £500,000 allowance by making the purchases before 30 September.

If it was to leave the purchase until December 2015, it would only get three months’ worth of the £500,000 level and nine months of the lower rate, potentially reducing the allowance to about £144,000.

The type of purchase agreement also affects the AIA – with hire purchase you can only claim the allowance once the machinery is on the farm and in use. Another option is to lease machinery, especially if the AIA is slashed hard.

With a finance lease – which isn’t eligible for the AIA – the rental payment and depreciation are allowable business expenses, which could be attractive compared with an 18% annual writing down allowance. You could also rent machinery to cover busy periods rather than purchasing a second tractor, for example.

See also: Use your investment allowance before the law changes

It is also important to categorise investments correctly to make the most of available tax relief: Although buildings aren’t eligible for the AIA, a lot of the fixtures and fittings will be.

Electrics, water and slurry systems all qualify, as do silage pits. Some energy-saving equipment may qualify for enhanced capital allowances, which may prove useful when the AIA level is cut back.

Renewable energy is certainly worth considering, especially if you are using a lot of energy on the farm. With the Feed-in Tariffs and Renewable Heat Incentive you should get a decent return on investment – but bear in mind the cost of replacing the equipment when it reaches the end of its life.

Whenever planning farm investments, it is essential to take a long-term view; there is no point investing in a large new parlour if the farm size restricts cow numbers, for example.

And if you are going to increase herd size, can your slurry system and other infrastructure cope? New technology may be attractive, but usually comes with added risk and cost, so do your homework and visit farms where is it already in use to see how it works in practice.

There is also no point in being overequipped. Do you need a 200hp tractor, or will a 150hp one do? If you are investing in new machinery, make sure it will be used to its full potential – and consider using a contractor for specialist jobs, as you will not only save the capital outlay on equipment, but also insurance and finance costs.