There were two unexpected but welcome changes in the Budget relating to capital allowances, which will be of interest to farming businesses looking to expand or reinvest.
Annual Investment Allowance
This allowance allows a 100% tax deduction in the year of expenditure by a business purchasing qualifying plant and machinery, such as a tractor, grain drier or even an anaerobic digester. The allowance is currently £200,000, but will increase to £1 million with effect from 1 January 2019 for two calendar years. However, the year end of the business making the expenditure needs to be considered to confirm what amount of the increase to £1 million will be available in the 2019 accounts.
- Any business with a year end of 31 December will be entitled to the full £1 million allowance in the year ended 31 December 2019.
- Any other business will only be entitled to a pro rata amount of the new allowance, depending on their year end.
- For example, a business with 31 March year end will only be entitled to an allowance of £400,000 in the year ended 31 March 2019 ((£200,000 x 9/12) + (£1,000,000 x 3/12)).
- The later that the year end of a business is in 2019, then the higher the available allowance.
However, the timing of the expenditure during the period is also important, as the increased allowance will only be available if expenditure is incurred after 1 January 2019. Therefore, a business with a 31 March year end can spend £200,000 before 1 January 2019, but the additional allowance available, because of the increased allowance from £200,000 to £400,000, will only be available if the extra expenditure is spent in the period from 1 January 2019 to 31 March 2019.
The increased allowance may allow a business to create a tax loss in 2019 which can be carried back to set against 2018 profits and result in a tax refund.
Additionally, for a sole trader or partnership, the availability of five year averaging of profits could mean that further tax refunds are available in respect of earlier years.
New buildings allowance
A new Structures and Buildings Allowance was introduced, which effectively replaces the previously abolished Agricultural Buildings Allowance, but is more restricted.
The relief available is 2% per annum for 50 years and will allow tax relief on expenditure on new commercial buildings or structures with effect from 29 October 2018. Therefore, tax relief should be available on the full cost of poultry sheds, livestock sheds and also reservoirs. The relief is only available to the party that carries out the construction, and will not be available on structures already in place when land and buildings are purchased.
Special rate pool
The rate of allowances available on the special rate pool has been reduced from 8% per annum to 6% per annum. This will increase the period over which the full allowances can be claimed on such items as air conditioning, water systems, and electric systems that are included in the ’shell’ of a building.