Purchasing Farming Machinery Timing

The Annual Investment Allowance (AIA) will reduce to £200,000 from 1 January 2021 after being increased temporarily to £1,000,000 from 1 January 2019.

The AIA is the amount businesses can spend on qualifying plant and machinery and receive a 100% tax deduction in the year of purchase. This has proved an invaluable relief to farming businesses over the years. Any large capital spend should be a commercial decision rather than a tax decision, but with the AIA reduction looming you do need to consider the timing of any machinery purchase to ensure you do not miss out on any significant tax relief.

If your accounting year end is 31 December, then the transition is simple, but for year ends that straddle 31 December, the transitions rules can be harsh and it is important these are considered. For example, a business with a year end of 31 March 2021 will potentially have available AIA of £800,000, being (£1,000,000 x 9/12) + (£200,000 x 3/12).

Whatever the timing of the expenditure over the year, the maximum AIA that can be claimed for the year to 31 March 2021 cannot exceed £800,000.

However, despite the limit never having been below £200,000 for the whole year, if the business has no qualifying expenditure prior to 31 December 2020 and then spends £200,000 in January 2021, the available AIA is only £50,000 (£200,000 x 3/12).  Capital allowances will be still available in the form of Written Down Allowance (WDA) on the balance, but the tax relief will be over a number of years, rather than in the year of purchase.

If possible a business should bring forward its capital purchases and ensure these are made ahead of 31 December 2020, to benefit from the maximum Annual Investment Allowance available.

If you would like to discuss the timing of machinery purchases and the reducing AIA, please do not hesitate to contact us.

Written by Lisa Oliver (LHP Associate, 27 October 2020)