Tax: Make the most of farm machinery claims while you can

Businesses can claim an annual investment allowance of £100,000 for plant and machinery.   This means that if machinery up to this amount is purchased, the entire cost can be set against tax in the year of purchase.  Any amount over £100,000 is however, restricted to the annual writing down allowance of 20%.   Big changes take effect next April which should prompt careful planning now.

Two changes need attention.  First the £100,000 limit on claiming full expenditure in the year drops to £25,000 from April 2012.  So bring forward any planned expenditure on plant and machinery if that would help to minimise the tax bill without upsetting other considerations of cash flow and finance.

Secondly the Budget introduced a rather technical amendment concerning what are called ‘short life assets’.   The maximum ‘life’ of a short life asset is to increase from 4 years to 8 years as of this April.  This could be a good way to accelerate claims for allowances on big-ticket items like large tractors, combine and other harvesters.

 The general idea of short life assets is this.  The Writing Down Allowances on Plant and Machinery work by allowing you to claim 20% of the ‘reducing balance’, ie how much was left on account after last year’s claim.  Mathematically this means that after four years the cost of about 59% of an asset has been claimed against tax, and after eight years about 83%. 

The balance stays in a ‘pool’ with the other plant and machinery, the total balance slowly reducing from year to year – but never quite arriving at a final value of zero.  Short-life treatment enables you to avoid this tailing depreciation effect.  If say a machine is bought for £100,000 (the annual investment allowance having been used up on other purchases) and sold after three years, the total tax expenditure claimed will be about £48,800 by then, leaving a balance of about £51,200 against future claims.  If at the end of the third year the machine is sold for only £40,000 the difference of the written down value and the sale price, ie £11,200, is claimed as a final allowance against tax so that the full depreciation on the machine has been claimed over the period of its ownership. 

Before this April it was only possible to use the Short Life treatment for up to four years, but this period has now been extended to eight years.  At current write down rates of 20% pa on an outlay of £100,000, about £41,000 of the original purchase price remains unclaimed after 4 years and about £17,000 after 8 years.  This compares unfavourably with the previous allowance of 25% pa, where the respective figures would be £32,000 and £10,000.  So it might make sense to look at short life asset treatment for some of your more expensive, rapidly depreciating assets where they are held for periods of less than eight years.

Do beware however, the sting in this allowance’s tail.  A balancing charge can arise to tax where the asset is sold for more than its written down value, so it will pay to take a careful look at second hand prices when deciding on which route to follow.

An adapted version of this article first appeared in Barbers Rural Newsletter, Spring 2011 edition, (Copyright Charles Cowap)

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