End of Year Tax Planning

Pre-year end planning for farmers

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As we approach the end of a year dominated by a global pandemic and Brexit, what are some of the issues that will impact tax bills in the coming year?

Capital Allowances – timing of expenditure

In technical terms, for a piece of equipment to be eligible for capital allowances, there must be an unconditional obligation to purchase the item. This is usually when it is delivered, but can be earlier if the order cannot be cancelled.

There is an added complication for items purchased on hire purchase in that the item must have been brought into use. This can cause issues with harvest equipment purchased out of season.

Capital Allowances – Annual Investment Allowance limit

In recent years, Annual Investment Allowance (AIA) has meant that 100% of most equipment purchases has obtained tax relief. The AIA limit was due to reduce from £1 million per year to £200,000 on 31st December 2020, but this has been deferred for a year. This means that the timing of expenditure later this year needs to be planned carefully to maximise tax relief.

Maximising Capital Allowance claims in buildings

The 100% AIA claims discussed above are mainly in respect of machinery and equipment. The position regarding expenditure on new buildings is more complicated as most of the cost will qualify for 3% Structures and Buildings Allowances. However, some categories of expenditure within buildings can qualify for AIA:

  • Items of plant such as silage clamps, slurry stores, handling facilities, etc which perform a function.
  • Expenditure on electrical fittings, water fittings, ventilation, and air conditioning, which are a separate category known as integral features.

It is, therefore, crucial to provide as much analysis of expenditure of this nature as possible.

Correctly identifying repairs and renewals

While expenditure on new buildings or improvements to existing ones qualify for 3% tax relief, repairs to an existing asset get 100% relief. Where a 30-year-old building undergoes major renovations it is not easy to identify how much qualifies as a repair. If the work is merely putting the building back to its original condition it is a repair. If the expenditure uses more modern materials or techniques, e.g. replacing a slate roof with galvanised metal sheets, this does not make it an improvement as the roof is still carrying out the same function.

However, increasing the size of the building, or changing its use will be an improvement. Again, careful analysis of the work done is necessary to maximise the tax relief.

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For Tax Planning advice, please get in touch with Keith Johnston on 0808 144 5575 or email help@armstrongwatson.co.uk.

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The deadline for February’s claims is 15 March 2021, so please submit claims to jrs@armstrongwatson.co.uk.