Is now a good time for farmers to invest in plant and machinery?
Agricultural companies need to carefully consider their investment options after the Spring Budget introduced several significant tax changes.
The Spring Budget on 3 March introduced a lot of new legislation for farmers to take on board, with some of it looking incredibly attractive at first sight, but they should be taking a cautious approach. On the surface the new super-deduction – which allows an uncapped 130% capital allowance on plant and machinery – which looks really exciting, but on closer inspection it’s smoke and mirrors.
10th March 2021
Catherine Vickery See profile
Those who have a five-year investment plan of over £1million – the Annual Investment Allowance (AIA) cap – should consider bringing it forward to take advantage of the super-deduction which runs from 1 April 2021 to 31 March 2023, as it has no spend cap. And anyone planning to buy something imminently should hold off until after 31 March 2021 to qualify.
However, the increase in Corporation Tax from 19% to 25% in April 2023 is going to be a shock for many companies. It looks to be only 6p more in every £1, but it’s an increase of over 30%, so if you had a £100,000 tax liability, it will now be over £130,000. When you deduct that extra money from your profits, it’s that much less to pay off debt or draw out of the business.
The Government wants businesses to be working well and producing profits ready for this change – which highlights just how much Corporation Tax is going up.
The increase in Corporation Tax means any benefits from the super-deduction could be nullified, especially for those investing less than £1 million. The 130% super deduction, combined with the current Corporation Tax of 19%, means that for every £100,000 you spend, you get £24,700 back in tax reductions.
But if you wait two years and have to pay Corporation Tax at 25% with no super-deduction, a £100,000 expenditure would allow for a tax reduction equalling £25,000. So, everyone is getting excited but when you run the numbers, it’s much of a muchness, meaning anyone investing below £1 million may be better to stick to their current investment plans.
One caveat is that if the Annual Investment Allowance (AIA) reduces in the next two years, it could undo any benefits of waiting, which could mean missing out on any advantages of the super-deduction. The decision to invest should be based on plans to become more profitable and productive; then assess which tax year this should be in. The chances are, in two years’ time the Government will still be encouraging investment.
Companies also need to bear in mind what assets are being purchased. Plant and machinery qualify for AIA but some assets, like solar installations, could cost well above the £1 million threshold. Here, there’s an argument to bring the spend forward as they get an annual writing down allowance of 6%, though this is pretty miserly the investment does qualify for AIA and is eligible for a 50% first-year allowance for these special rate assets – up from 8% – under the new super-deduction.
Partnerships and sole traders may be wondering whether to become a limited company to take advantage of the super-deduction. Caution is needed; don’t make a rush decision, it all sounds very attractive but against a backdrop of 25% Corporation Tax in 2023, it will be really quite penal – and will put a lot of people off incorporating.
Partnerships and sole traders can still benefit from the new three-year loss relief carry back, anyone who can back-date losses will still qualify for 100% AIA – so a heavy investment now, resulting in making a loss, could be carried back three years to reclaim the tax. This could free up significant amounts of cash to use in the business going forward.
Just remember not to look at the situation solely from a tax perspective – though it’s important, it’s not nearly as important as making the right investment decision to boost the profitability of your business’