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How can farmers make the most of the Annual Investment Allowance?

POSTED: 17th December 2015
IN: Guides
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With the Annual Investment Allowance set to change from 1st January 2016, Aldermore takes a look at how farmers can make the most of this valuable tax relief.

In the summer budget, Chancellor George Osborne announced that from 1st January 2016, the Annual Investment Allowance (AIA) will be set at a permanent level of £200,000. While the AIA offers major benefits to farmers, there still seems to be a certain amount of confusion surrounding the topic.

What is the Annual Investment Allowance?

The AIA is a form of capital allowance, enabling farmers to claim tax relief on certain purchases and investments. What this means is that when you are calculating your profits and losses at the end of the financial year, you can deduct the full value of any item that qualifies for AIA from your profits before tax.

Farmers can claim their AIA for items used as part of their business, including plant and machinery. Cars and other items used as part of the business do not qualify for the allowance. 

What is changing?

Since its introduction in April 2008, the government has made a number of changes to the qualifying expenditure that can benefit from the AIA, leading to an increasing amount of confusion.

Sole traders/partners

Limited companies

AIA

6 April 2008 – 5 April 2010

1 April 2008 – 31 March 2010

£50,000

6 April 2010 – 5 April 2012

1 April 2010 – 31 March 2012

£100,000

6 April 2012 – 31 December 2012

1 April 2012 – 31 December 2012

£25,000

1 January 2013 – 5 April 2014

1 January 2013 – 31 March 2014

£250,000

6 April 2014 – 31 December 2015

1 April 2014 – 31 December 2015

£500,000

 

The AIA was intended to drop back down to £25,000 from 2016, but George Osborne announced in the summer budget that it would be set permanently at £200,000. This has been widely reported as an increase, as it is an increase from the £25,000 it was supposed to go to, but is being viewed as a reduction by many businesses who had been utilising the maximum £500,000 allowance.

Making the most of the Annual Investment Allowance

At first glance, farmers may be disheartened by the apparent drop in AIA, from £500,000 to £200,000. However, the fact that the new figure is a permanent one brings with it new benefits.

Pat Tomlinson, from Chartered Accountants Albert Goodman, commented on the announcement, saying: “One of the main benefits of this announcement is that it enables businesses to plan capital expenditure rather than make snap decisions to try to avoid a tax bill, for fear that the allowance might reduce in future or even disappear.”

In order to get the maximum benefit from the AIA, it is essential that farmers plan the timing of any expenditure carefully. If, for example, it appears that you will not claim the full AIA for the current financial year, consider bringing forward future expenditure to ensure that it qualifies for relief this year.

Alternatively, if you have already used your full AIA for the financial year, consider pushing back any expenditure to the next year, to ensure you can claim tax relief on it then.

It is also important to keep in mind everything that can qualify for the AIA when planning ahead. As previously mentioned, the AIA applies to all plant and machinery equipment purchased, including alterations to existing buildings to install other plant and machinery.

Farmers can also claim back their AIA allowance when using alternative finance options, like asset finance. The AIA is even applicable to the interest charges in hire purchase agreements, meaning it can be just as lucrative for businesses that need to borrow funding to afford new machinery as for those that can pay outright.

Finally, with the AIA reducing from January 2016, farmers need to be careful when calculating their maximum entitlement. If you have a 12 month chargeable period running to 31st March 2016, your maximum AIA entitlement would be calculated as follows:

  •          The proportion of the period from 1st April 2015 to 31 December 2015 i.e. £500,000 x 9 / 12 = £375,000
  •          The proportion of the period from 1st January 2016 to 31st March 2016 i.e. £200,000 x 3 / 12 = £50,000
  •          Combined together to give a total allowance of £425,000 for the entire financial year

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