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Remember the capital allowances trap? It’s on its way back.

We have enjoyed Annual Investment Allowances of up to £1 million of expenditure for the last 21 months, and the regime retains this generous benefit until 31st December this year. 

Many commentators were expecting this generous relief to continue, as a way of encouraging capital investment following the COVID created economic downturn.

The news would have been brought to us in the Autumn Budget, however Rishi Sunak has now scrapped this year’s budget. This raises the reality that the current annual investment allowance will drop back to £200,000.

The £200,000 allowance will still be sufficient for many farming businesses, but we are back to the position that purchases on or after 1st January will fall under these rules. This means that the allowance available will be the time apportioned for your accounting period.

So, if you have a business with a March year end, over the course of the year to 31 March 2021, you will have £800,000 of available AIA. (1,000,000 ÷ 12 x 9) + (200,000 ÷ 12 x 3). If you spend £800,000 before 31st December, then you will benefit from the full allowance. However, if you spend £800,000 in January, you will only get £50,000 of AIA, with the balance qualifying for normal writing down allowances at 18%.

This change means that the difference of two days could result in losing £615,000 of instant tax relief!

Obviously very few businesses will utilise £800,000 of relief, but if you have a 2nd February year end, and swap a tractor with a cost of £50,000 in January, you will only get £22,666 of relief, resulting in an extra tax charge of £8,000 for a basic rate taxpayer, or £11,500 for a high rate taxpayer!

This is only a cash flow benefit as the full relief is still available over time, but it can have large cash flow implications. Therefore, if you are spending significant sums on plant and machinery, you might benefit from ensuring that expenditure is incurred before 31st December. Remember that if buying items on hire purchase, they must be in use to claim the full allowances.

If you have any queries, please contact one of our farming team at hello@doddaccountants.co.uk.

<Sep 2021>
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Sep 26

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