Business Clinic: What are the rules on capital allowances?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s experts can help.

Here, Alan Taylor of accountant Baldwins answers three questions on how the Annual Investment Allowance (AIA) works for farming businesses and gives tips on what to watch out for.

See also: Business clinic – tax advice on making more of woodlands

Q. We are expecting our farming company profits for the year to 30 November 2019 to be good, due to the prices achieved for the 2018 potato crop.

We need to replace two tractors and some potato equipment plus a diesel car. What capital allowances are available and what rules do we need to consider?

A. The Annual Investment Allowance (AIA) provides a 100% allowance for qualifying expenditure on plant and machinery of up to £1m for the year ended 31 December 2019.

Prior to that, the maximum allowance was £200,000/year.

The maximum allowance for your company year end 30 November 2019 is apportioned and calculated as 1/12 x £200,000 plus 11/12 x £1m = £933,334.

You need to consider other expenditure on plant and machinery in the year to date and check that this, plus the new tractors and equipment, is below the maximum AIA limit of £933,334.

You need to note that expenditure incurred in December 2018 will only qualify for AIA up to the annual maximum at that time of £200,000.

Q. We have spent £50,000 so far this year on our plant. The new tractors and equipment will cost £500,000 and we have been offered £200,000 for the old equipment as trade ins.

What will our approximate capital allowances claim be if we proceed with the purchases?

A. Assuming you acquire the new assets before the year end, you will have plant and machinery additions eligible for AIA amounting to £50,000 plus £500,000 – ie, £550,000.

The company has a general pool of expenditure on which it has not yet claimed allowances brought forward from last year of £250,000.

The trade ins of £200,000 are deducted from this pool and an annual writing down allowance of 18% is available on the balance of £50,000, giving an allowance of £9,000.

The balance of the pool (£50,000 less £9,000 = £41,000) will be carried forward to the next financial year.

This gives the company a total claim of £550,000 plus £9,000 = £559,000 for its 2019 financial year.

Regarding the replacement car, motor cars do not qualify for AIA.

An annual writing down allowance at 8% (or 18% if it has lower emissions) is available for the car.

Electric and very low emission vehicles can qualify for a 100% first-year allowance.

However, generally, crew cab pickup trucks qualify for AIA.

It is worth noting that if you are considering using HP finance to buy new equipment, you will still get AIA provided the assets are brought in to use by the year end.

However, AIA is not available if you use lease-based finance.

Q. If we decide to defer the new equipment changes, will AIA be available in the future?

A. The £1m AIA limit is in place until 31 December 2020.

Thereafter, the limit will revert to £200,000.

When making AIA claims, it is important to remember that the allowance is a means of accelerating tax relief.

In the future, if the business scales back or has a few years where there is low expenditure on plant and machinery, the proceeds of the plant sold will be taxable and little writing down allowance will be available.