The Annual Investment Allowance (AIA) is a form of tax relief that allows farmers to deduct the full value of an eligible machine or plant equipment, subject to a maximum amount, from their profit. before tax.
The allowance has been temporarily set at £ 1million over the past three years, but will drop to £ 200,000 from January 2022. This will bring it back to the same level as in 2018.
John Thame, farming partner of accountant and tax adviser Ellacotts, says it’s crucial to check the detail of AIA rules and fully understand the time implications, as this can have a significant effect on the allocation available.
Any decision to purchase equipment should be based on an established machinery investment strategy, including benchmarking machine costs, which can help determine whether a business is selling too much or not enough equipment.
“Don’t spend the money just to save tax – there has to be a good business reason for spending the money,” he says.
The particular situation of each farm is also likely to require specific financial and tax advice, which should be sought as a priority.
“However, in general, if you are planning to purchase plant and machinery, it is essential that you make these purchases as soon as possible, to get the most out of the AIA at the rate plus £ 1million. also consider the potential for supply chain delays, ”Thame said.
How does AIA work?
If a company has a year-end on December 31, relief is straightforward, as the full £ 1million allocation will be available. However, when the end of the year falls after January 1, 2022, transitional rules apply.
Under these rules, the available AIA is compiled in two parts, which are then added to calculate the maximum potential AIA for that particular accounting period. The two parts are:
- The AIA available on the basis of the temporary limit of £ 1,000,000 for the proportion of the tax period falling before 1 January 2022
- The AIA available on the basis of the limit of £ 200,000 for the proportion of the tax period falling on or after January 1, 2022.
For example, if a company has a year-end on March 31, 2022, the maximum potential entitlement to AIA would be calculated as follows:
- £ 1million x nine months = £ 750,000 (April 1-December 31, 2021)
- £ 200,000 x three months = £ 50,000 (January 1, 2022 – March 31, 2022).
Maximum potential AIA £ 800,000
Who is eligible for AIA?
AIA can be claimed by sole proprietorships, corporations and partnerships, except when the members of the partnership are not individuals, such as a corporation or a trust.
Farm businesses run as public limited companies are currently eligible for super-deduction or AIA. The super-deduction is a capital deduction of 130% with a duration of two years from April 2021.
This is only available to companies, in part to offset the increase in corporate tax from April 2023.
Unlike the AIA, there is no cap on the level of capital investment that qualifies for the super-deduction allowance, but all installations and machinery purchased must be new.
An agricultural business managed as a limited liability company cannot claim the AIA and a super-deduction on the same amount of eligible expenses.
However, AIA could be useful in scenarios where super-deduction is not available (for example, certain assets purchased second-hand or second-hand).
How does timing of purchase affect AIA?
A careful expenditure schedule is necessary, as AIA must be claimed during the period in which the eligible expenditure is incurred, Mr Thame said.
For example, if a farming business purchased a machine costing £ 400,000 on September 30, 2021 and another costing £ 400,000 on February 28, 2022, it can be assumed that the total allowable expenditure of £ 800,000 would qualify for AIA. 100 %.
However, since the second machine was purchased after December 31, 2021, the AIA limit is limited to the period January 1, 2022 to March 31, 2022, which is £ 50,000.
Therefore, the AIA request for the period will be £ 450,000 (£ 400,000 for the first machine and £ 50,000 for the second). The remaining £ 350,000 of expenditure would be eligible for depreciation allowances at the standard rate of 18%.
Had both machines been purchased before December 31, 2021, the maximum AIA of £ 800,000 could have been claimed.
The date on which the eligible expenses are incurred will normally be the date on which the contract becomes unconditional which, in the case of outright purchase of machinery, will likely be the invoice date or the delivery date.
What qualifies for AIA?
There is a full list of items that AIA can be claimed on the UK Government website.
However, as an indication, it can be claimed on installations and machines which are kept for use within the company.
Machines can be new or used, although there is a restriction that means the AIA is not available if the kit is purchased from a connected person. This is to prevent the allowance from being abused.
Qualifying equipment may include:
- Tractors, combines and other agricultural machinery
- Vehicles used in the business, such as pick-ups, vans and trucks
- Computers, office equipment and all kinds of office machines
- Cost of demolition of installations and machines
- Parts of a building considered to be an integral part, including conveyors, lighting, ventilation
- Certain appliances – for example, fitted kitchens or bathrooms when used in a business
- Modifications to a building to install plant and machinery – this does not include repairs.
There are sometimes misconceptions when people build a building, says Thame.
Most of the costs of constructing a building relate to the floor, walls and roof, which are not eligible for AIA, but will be eligible for the structures and buildings allowance (currently 3% per year).
However, such a feature as a grain slatted floor, which performs the function of ventilation, cooling and drying, may be eligible for AIA as it is considered the key to specific processes and functions. Likewise, other characteristics of the building may also be admissible.
Other categories of expenditure not immediately obvious, such as plant and machinery, but which may still be eligible for AIA, include slurry stores, silage pits and roofs of slurry stores. This is because they perform a specific function.
Can I ask for the AIA if I buy on hire purchase?
If a good is purchased on hire-purchase, AIA can only be claimed on payments when the machine is put into service. This rule can trip people up over off-season purchases of combine harvesters or balers.
It may be worth considering another method of financing the purchase if it is not possible to bring the new asset into service by the end of the year.
Capital deductions are not available if machines are leased, although income tax relief is available on rental costs.
How does financial aid affect AIA?
Some farmers in England are hoping to purchase equipment with a grant from the Farming Investment Fund, which is expected to open later this year.
The AIA will only be available on the amount of money paid by the company after deducting the grant.
Care should be taken when exchanging or selling old kits, as the sale of any machine could result in tax liability.
This means that if you are trading high value machines, it is advisable to replace them in the same fiscal year, so that each action compensates for the other.
The October 27 budget could introduce changes in AIA limits or other tax breaks – Farmers Weekly will update readers when it does.