The timing of capital expenditure is always worth considerating. The annual investment allowance (AIA) limit for immediate tax relief expenditure on plant and machinery will reduce from £1 million on 31 December 2020 to £200,000.
If you are looking to invest in new equipment and buildings, the loans available may offer an opportunity to do this in a tax efficient manner by making full use of the £1 million limit before it is removed. Assets that qualify for AIA include machinery such as tractors and fixed equipment that is part of a building. Such as heating, lighting and ventilation systems.
Depending on the loan required, one of the three government backed loan schemes currently available might allow you to buy the equipment sooner to claim the full AIA. If you are considering a significant capital investment, it is always worth speaking to your advisor beforehand to discuss timing and funding options.
Farmers averaging claims
Farmers averaging claims can be made for two or five years. The claim allows profits of the period to be averaged over each tax year and 'smooths' out the peaks and troughs of farming profits. This can ensure that tax is not paid at 40% or 45% in one tax year while the 20% tax band is not utilised in another tax year.
Recent events may mean that farming profits are expected to fall over the next few years. Therefore, it is essential that the averaging of profits is reviewed each year to maximise the tax and cashflow benefit available. This could result in a tax refund if tax was previously paid at 40% or 45% on earlier profits.
Change of accounting year end
Sole traders and members of a partnership are charged income tax on profits made in an accounting period that ends in a tax year. Therefore, if a business has a 30 April year end, the profits that will be taxed in the year ended 5 April 2021 will be the profits for the year ended 30 April 2020.
If your business is expected to make a loss in the current year to say 30 April 2021 due to the impact of coronavirus, or for any other reason such as significant capital expenditure qualifying for AIA, it is worth considering changing your accounting period end date to 31 March 2021.
The loss for the 11 months to 31 March 2021 will be combined with the profits for the 12 months to 30 April 2020 in calculating the taxable for 2020/21. This will bring forward the timing of the loss relief and provide a cashflow benefit.
Research and development tax credits
For businesses which trade as a company the cash that can be generated by making a valid research and development tax credit claim can be significant. The sort of work that would be eligible for support is often wider than you might think and we have seen dairy farmers, soft fruit growers, livestock finishers and food businesses all make successful claims as well as the more technology based businesses. The key requirement for eligibility is to demonstrate that you are developing new technologies or approaches that substantially improve products, processes, devices, materials or services. Please call the Hazlewoods R&D team for more information.
For those with cash there will be opportunities. This could be in your own business or more general investments. The stock market has already bounced from the low point around 23 March 2020 when the FTSE 100 momentarily dropped below 5,000 to the point of 5,740 on 14 May 2020 and for some this will still represent a buying opportunity.
Rolling over capital gains
For those who have realised capital gains and intend to rollover those gains, it may not be possible to incur eligible expenditure at the moment. It may well be possible to extend the rollover period so rather than having 3 years to reinvest the proceeds this period is extended to 6 years. It is also possible to roll gains back into purchases made up to 12 months prior to the sale. Where sales are delayed in the current environment then it may well be possible to roll back 3 years. It would be a good idea to keep evidence of what you are doing to try and incur expenditure or to make your sale and also worth writing, or more likely asking your accountant to write, to HMRC to extend the rollover period. HMRC will very rarely confirm that the extension will be given until sale of the old and acquisition of the new asset, but this correspondence can be useful contemporaneous evidence of the problems being encountered.