Annual Investment Allowance Increase

The NFU has continuously highlighted to the government that a supportive capital allowances regime is essential to farming, where businesses are continuously making significant investments in plant and machinery.

One pound coin on black backgroundWe opposed the previous reduction in the Annual Investment allowance (AIA) to £25,000, highlighting that it would have a disproportionate impact on the vast majority of farming businesses.

We are therefore very pleased that the government has chosen to substantially increase the Annual Investment Allowance to £250,000, albeit for a temporary two year period.

There are however some key points to note for those now considering making a substantial purchase of plant & machinery.

What the Annual Investment Allowance (AIA) means

Businesses are able to claim the AIA in respect of their expenditure on both general and "special rate" plant and machinery. It therefore applies both to farm machinery and equipment such as heating, lighting, ventilation and water systems. It also applies to most forms of slurry store and renewable energy equipment. It will not however apply to buildings or structures.

The AIA is effectively a 100 per cent allowance that applies to qualifying expenditure up to a specified annual limit or cap. Where businesses spend more than the annual limit, any additional expenditure is dealt with in the normal capital allowances regime, entering either the main rate or the special rate pool, where it will attract writing-down allowances at the 18 per cent or 8 per cent rate respectively.

How the increase will work

The measure will have effect from 1 January 2013 for all businesses (whether within the charge to corporation tax (CT) or within the charge to income tax (IT)). Where a business has a chargeable period that straddles 1 January 2013, transitional rules
will apply.

For a business with a 31 March year end this means the annual investment allowance for the year to 31 March 2013 will be calculated as:

(a) the proportion of a year from 1 April 2012 to 31 December 2012, that is, 9/12 x £25,000 = £18,750; and,
(b) the proportion of a year from 1 January 2013 to 31 March 2013, that is, 3/12 x £250,000 = £62,500.

The business will therefore have a maximum AIA for the year of £81,250.

It must however be noted that a maximum of £25,000 of expenditure prior to 31 December 2012 will qualify for the AIA in the year to 31 March 2013.

Key points to note

Understanding how your accounting date determines the amount of AIA available is essential to maximising your AIA claim. Indeed in some cases early tax relief may be obtained by delaying a purchase until after the end of your current accounting period.

It is also very important to understand when expenditure will be treated as incurred for the purposes of the AIA. For an outright purchase, or a purchase funded by a bank loan, the expenditure will normally be deemed to have been made when the equipment is delivered. However for an HP purchase the date of expenditure is normally based on when the equipment is first brought into use.

The date of any payments, delivery, and when the equipment is first used can all have a significant impact on how quickly you will obtain tax relief on your purchase. Indeed they could still affect when tax relief will be given on machinery already on order.

Professional advice should be taken as early as possible in relation to any significant order for plant and machinery. Initial advice can also be obtained through NFU Call First on 0870 845 8458.

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