27 October, 2011

Now that the harvest is in and things are starting to quieten down on farms during the autumn and winter months, careful thought should be given to capital expenditure plans on tractors and machinery before next April.

At present businesses obtain the annual investment allowance (AIA) on expenditure up to £100,000 for which they get 100% tax relief. From April 2012 this allowance is reducing to £25,000 which is a very serious reduction for most farmers. With even an average tractor costing around £60,000, and some way in excess, agricultural businesses need to give serious consideration now to making capital purchases before next April, because of, in some cases, long order and delivery times and the need to get finances lined up.

The following example shows how dramatic the reduction in AIA will be. Assuming profits of £75,000, after depreciation of £40,000, and expenditure on a tractor and other machinery totalling £100,000 the tax position before and after April 2012 is as follows:-

	Year ended 31/03/2012	Year ended 31/03/2012
Profit	75,000	75,000
Depreciation (which is added back for tax purposes)	40,000	40,000
	----	----
	115,000	115,000
Capital allowances
AIA	(100,000)	(25,000)
Writing down allowance on remainder
£75,000 x 18%	-	(13,500)
	----	----
Taxable profit	£15,000	£76,500

 

For a sole trader this will mean that profits, which would have been wholly taxed at the basic rate of 20% in 2011/12, will suffer tax at 40% on about £34,000 of the profits in 2012/13.

For a sole trader this will mean that profits, which would  have been wholly taxed at the basic rate of After April 2012, because the AIA is lower, more of the capital cost will be subject to the annual writing down allowance of 18% per annum on the reducing balance. Tax relief will be received eventually but it will be spread over a much longer period.0% in 2011/12, will suffer tax at 40% on about £34,000 of the profits in 2012/13.

Once we are in the new regime post April 2012, businesses should ensure that they utilise the £25,000 AIA each year without wasting it in any year. To achieve this, make sure that capital expenditure is spread evenly from year to year and that you have a regular replacement programme for tractors and machinery.

There is no doubt that farm businesses will see an increase in tax going forward, but there are actions that can be taken to mitigate this additional burden by perhaps restructuring the business, or by paying pension contributions or by making tax efficient investments. Please call us on 01872 276477  if you would like further advice in any of these areas.

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