Making the Most of Tax Reliefs Available on Capital Expenditure Incurred on the Farm
Author: Associate Director, Rhys Jones
One of the ways in which you may be looking to invest in your farm going forward is in the construction of agricultural buildings, be they milking parlours, sheds or slurry systems. You may also be looking to invest in machinery or buy land. Outlined below are the tax reliefs available depending on the nature of expenditure incurred.
Since 29 October 2018, the construction of agricultural buildings has been eligible for income tax relief at a rate of 2% over 50 years via the Structure and Buildings Allowance (SBA). Although this was increased to 3% over 33 and one third years from April 2020, the rates remain extremely low when compared to the relief available on expenditure qualifying as ‘plant and machinery’, where the Annual Investment Allowance (AIA) can be claimed on both new and second hand items at a rate of 100% on expenditure up to £1m per business. From 1 January 2022, the AIA limit will be reduced to £200,000 per annum.
How does it work?
It is important therefore, given the wide discrepancy in the rate of tax relief available, to identify all items of expenditure within a construction project that qualify as plant and machinery in order to maximise the tax relief you can claim. Items of capital expenditure which would meet the definition of plant and machinery – and therefore qualify for relief at the rate of 100% available via AIAs, include:
- storage tanks
- concrete panels
- gutters and piping
- tractors, trailers, pick up vans etc.
- electrical systems
- water management systems
- feed systems
Typically we find that at least 70% of the construction costs relating to milking parlours will qualify as plant and machinery and therefore the majority of this expenditure will achieve the maximum tax relief available.
We would usually find that 100% of the cost of a new slurry system or a silage clamp would qualify as plant and machinery and therefore, this investment from a purely tax saving point of view is very efficient.
Less efficient would be the construction of a general storage shed, where the percentage of the costs that would qualify as plant and machinery would be much lower and therefore tax relief on the majority of the construction costs would only be available at 3% via the SBA.
Changes for limited companies
For a two year period between 1 April 2021 and 31 March 2023, farmers trading through a limited company will also qualify for a ‘super deduction’ of 130% of the cost of new plant and machinery with no limit on the amount of capital expenditure that can qualify. Note that unlike AIAs, second hand items will not qualify for this relief.
Meanwhile, Integral features such as electrical systems will qualify for a special rate first year allowance (SR allowance) of 50%. These items are also required to be new and unused. Note that limited companies will continue to receive the AIA allowance and therefore the SR Allowance is only beneficial if a company has fully utilised its AIA which gives tax relief at the higher rate of 100%.
There is no immediate income tax saving available on the purchase of land, but the original cost will be available to set off against any sales proceeds should you sell the land in the future, reducing your capital gains tax liability. Tax relief would however be available on the interest cost of any loans taken out to purchase the land – and this would be available at a rate of 100%.
Timing is key
The timing of capital expenditure can also be critical in optimising the tax savings you achieve, especially when farming profits can vary from year to year. Software packages such as Xero and QuickBooks allow farmers to continually monitor their profits and subsequently their tax liabilities. Action can therefore be taken in a timely manner to bring forward capital expenditure should this be more beneficial from a tax point of view.
Talk to Us
Many of you are already receiving monthly, quarterly or half-yearly management accounts from us during the year; but if this is not the case and you would be interested in receiving such information, then please get in touch via our Let’s Talk page.
If you are a farmer and wish to gain specialist tax advice from accountants with vast experience in your sector please get in touch with our team at LHP!