Increased Annual Investment Allowance (AIA)

The annual investment allowance (AIA) available for capital allowances increased in the 2018 Budget to £1 million until 31 December 2020.

This means that the amount spent on new plant and machinery qualifying for a 100% tax deduction in the year of expenditure has increased.

However, when planning the timing of expenditure, a farming business needs to consider its accounting year end date and the timing and amount of other expenditure it has incurred in its financial year. This is because the manner in which the increased AIA becomes available means that it is not available to all businesses spending £1 million on new machinery. The £1 million allowance will only be available in respect of expenditure incurred after 1 January 2019.

How much of the increased allowance will be available?

The year end of the business incurring the expenditure needs to be considered to confirm what amount of the increase to £1 million will be available in the 2019 accounts.

• Any qualifying 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 qualifying business will only be entitled to a pro rata amount of the new allowance, depending on their year-end.
• For example, a business with a 31 March 2019 year end will only be entitled to an allowance of £400,000 in the year (£200,000 + ((£1,000,000-£200,000) x 3/12)).
• The later that the year end of a business is in 2019, the higher the available allowance.

The timing of the expenditure during the period is also important, as the increased allowance 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.

Relevant date of purchase of equipment for capital allowances

If an asset is being purchased outright, with no finance, the acquisition date for tax purposes is the date that the invoice is issued. However, extended payment terms cannot be available. If there is a gap of more than four months between the invoice date and the date on which payment is required to be made, the expenditure is not incurred until the date on which payment is required to be made.

If an asset is being acquired with hire purchase, the acquisition date for tax purposes is the date that the asset is brought into use. Therefore, for agricultural machinery, the machinery must have been delivered before the year end for a tax deduction to be obtained. Additionally, the hire purchase must be on ‘normal’ payment terms.

What entities do not qualify for AIA?

AIA is not available to a partnership where non-individuals are members. Therefore, a partnership with a company or trust as a partner, will not qualify for AIA. Such partnerships are not uncommon, as corporate partners have been used for income tax planning and trustees included as partners in order to maximise inheritance tax reliefs under Balfour type principles. However, if capital expenditure is incurred in a corporate partner or a trust that is a partner, these entities may qualify for AIA.