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In this article, Peter Griffiths, Tax Director at Hazlewoods, provides advice on how to effectively use capital deductions for investing in new equipment.
Q Myself, my wife and our two sons are partners in a farming business.
We also have a limited company that does subcontract work both for the partnership and for third parties. We plan to purchase new equipment for both companies in 2017.
What do we need to consider to maximize the capital deductions on new equipment in fiscal 2017?
A An Annual Investment Allowance (AIA) of up to Â£ 200,000 will be available for each company’s qualifying expenditure for each financial year. This means that up to Â£ 200,000 of qualifying expenses can be charged against the company’s income in the year the expense is incurred. AIA is not available on cars.
If either company’s qualifying expenses exceed Â£ 200,000, an 18% Amortization Allowance (WDA) will be available on the excess for that business.
The WDA is reduced to 8% if the equipment is considered part of a building, for example a ventilation system. These are generally called integral characteristics.
See also: Tax implications of backyard housing construction
Equipment will need to be purchased by the end of each company’s fiscal year 2017 in order for capital deductions to be available in fiscal year 2017. The April 5 fiscal year end for individuals is not a relevant deadline, unless of course it is also the end of the accounting year.
Date of purchase of equipment relevant to capital deductions
If an asset is purchased directly, without funding, the acquisition date for tax purposes is the invoice issue date. However, extended payment terms may not be available.
If there is a difference of more than four months between the date of the invoice and the date on which payment is due, the expenditure is not considered incurred until the date on which payment is to be made.
If an asset is acquired with a hire purchase, the tax acquisition date is the date the asset is put into service.
Thus, for agricultural machinery, the machinery must have been delivered before the end of the year for a tax deduction to be obtained. In addition, hire-purchase must be made under ânormalâ payment terms.
For example, an arable company whose year ends on April 30 and which acquires a new combine harvester entirely on hire-purchase in April 2017, which will not be used until August 2017, will not obtain depreciation on combine before the end of April 2018, because the machine was not in use until the end of April 2017. Any amount paid in cash or partially exchanged will receive tax relief over the course of of fiscal year 2017.
Which entities are not eligible for AIA?
AIA is not available for a partnership where non-individuals are partners. Therefore, a partnership that has a business as one of its partners, or that includes a trust as a partner, will not be eligible for AIA.
Such partnerships are not uncommon, as partner companies have been used for tax planning and trustees included as partners to maximize inheritance tax relief.
However, if the capital expenditures are incurred by a business that is a partner company or a trust that is a partner, these entities may be eligible for full AIA.
Maximize capital deduction requests
Claiming capital deductions as early as possible while maximizing the AIA will normally only be a time benefit, as the deductions can be claimed at a later date if the AIA is not claimed.
However, the recalculation of the five-year farmer average for individuals could allow for the reimbursement of additional tax following a capital deduction claim as soon as possible.
It is even more important to ensure that available capital deductions are maximized and are not overlooked in claims.
This is particularly relevant for new buildings and new equipment in buildings, for example a milking parlor building or a grain dryer. It is essential that all full feature expenses eligible for capital deductions are identified – this may qualify for AIA up to the Â£ 200,000 limit and will then attract the WDA at 8%.
It is therefore very important to obtain detailed quotes and invoices so that these amounts can be identified and claimed.
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