Welcome to our summer edition of Farming Matters. A lot has changed since our last issue and most of our conversations and the underlying theme of…
Since the Budget there has been much noise about the super-deduction only being available to companies, with partnerships and sole traders, which still make up the vast majority of businesses in the rural sector, not being able to take advantage of these enhanced capital allowances.
Similarly, we are often questioned why valuable R&D tax credits are also not available for unincorporated businesses. A reasonable question which unfortunately cannot be answered. However, one could argue that these are both examples of the governments focus on the incorporated sector and perhaps their somewhat short sightedness to the importance of the unincorporated sector in the UK economy.
Looking forward, perhaps those partnerships and sole traders should re-focus on the impact of the fall in the so-called Annual Investment Allowance (AIA) in January 2022 if they are planning to purchase new machinery in the coming year.
Currently all businesses can claim 100% write off on qualifying plant and equipment – and indeed, where applicable, integral features – at a level of up to £1 million per annum for purchases made before December 31 this year. From January 2022 the annual threshold for the so-called AIAs reduces back to the default £200,000 per annum, and this can have a significant effect depending on when your financial year end falls.
Take, for example, a farming partnership with a typical year end of 31 March 2022. That business will only have an annual investment capacity of three twelfths of £200,000 in the last quarter of its current financial year – a total of £50,000. In contrast, for the first nine months of the year, up to 31 December 2021 when the investment allowance reduces, the business will have nine twelfths of the £1 million AIA – or £750,000 of capacity to make machinery changes and write off the value of the replacement equipment at 100%.
The message here is that for partnerships and sole traders with a year end other than December 31, and in particular the many with a March 31 year end, leaving all your equipment investment decisions until the last quarter of 2021/22 might well result in far less immediate tax relief than you expected to gain.
The situation may be worse if you combine the tax effect of selling old machinery in part exchange deals and the limitation on relief for new machinery, with the default writing down allowance set at a rather paltry 18%.
As always, businesses should only consider changing machinery when there is a business need to do so and when the deals are right for them. Depreciation is still one of the largest costs in many agribusinesses and managing that cost is even more critical as farm incomes potentially come under pressure as a result of free trade and the impact of the Agriculture Act with the phasing out of the Basic Payment Scheme.
For companies, the situation is different and whilst they enjoy the so-called 130% super-deduction for the next couple of years, they also face increased corporation tax rates from April 2023, hence why they have been given higher capital allowances in the meantime.
So, for many partnerships and sole traders, they may be happier to trade off the absence of super relief if they felt their own tax rates were unlikely to rise.
Unfortunately, this cannot be guaranteed and we may also see income tax and National Insurance rates rise, as the government starts to consider the most strategic ways in which it can deal with the significant additional borrowing caused by dealing with the Covid-19 pandemic.
For more information or advice, please contact our Agricultural team.
This article was first published in the Western Morning News on Thursday 20 May 2021.