The tax allowance on the purchase of plant and machinery used on the farm is obtained by claiming Capital Allowances on the eligible cost, net of vat and capital grants, new or second hand.
There are a number of capital allowances available; the most important is the Annual Investment Allowance (AIA). The recent budget introduced a temporary increase in the AIA to £1 million per year for the period 1 January 2019 to 31 December 2020.
Where the financial year of a business straddles either the 1 January 2019 or 31 December 2020 transitional rules apply. The rate of the AIA is up to 100 per cent; the amount of expenditure not claimed in the first year is eligible to be claimed at the rate of 18 per cent per year, reducing balance.
There is no specific tax definition of “plant and machinery”. Machinery is easy to identify but “plant” requires more attention and is subject to interpretation. A good starting point in identifying plant is that it is an asset used in the farm business which is not a building, structure or machinery and has a function on the farm. Farm expenditure on thermal insulation of buildings, moveable partition walls, cold stores, silage clamps, storage tanks and slurry pits/midans is allowable as plant for capital allowances purposes.
The timing of expenditure requires attention for tax planning purposes. Firstly, the date of the claim is the date that the item of plant and machinery is first used in the farm business. Secondly, if there is a gap of more than four months between the date on which the expenditure is to be paid and the date that it is paid, or a finance agreement signed, the date of claim for capital allowances purposes, is the later date.
The recent budget introduced a new Structures and Buildings Allowance at the rate of 2 per cent per year on a straight-line basis for expenditure incurred on or after the 29 October 2018. Structures and buildings include offices, retail and wholesale premises, walls, bridges, tunnels, factories, warehouses, general purpose buildings, cattle and sheep houses.
From tax planning and cash management points of view, the classification of capital expenditure on farms is critical. As mentioned earlier, there are still huge areas of potential dispute over what constitutes plant in particular. Some of these areas of dispute have been the subject of recent Tax Tribunal decisions. The key outcome of some of the Tax Tribunals is that the HMRC interpretation of eligible expenditure is not always correct and many have ruled in favour of the tax payer.
Where a farm is embarking on significant capital expenditure perhaps linked to the proposed opening of Tier 2 by DAERA, detailed consultation with the farm’s accountant is required. This will ensure that the evidence supporting the expenditure entitles the farm business to tax relief, where possible, and is consistent with the comments in the recent tax tribunal cases which are very enlightening.
For further information, telephone (028) 8224 1515.