Capital tax allowance could slash bills and boost income
Farmers claiming the new 100% tax relief on capital expenditure could slash their tax bills and claim valuable tax credits, says accountant Old Mill Rural Services. The Annual Investment Allowance (AIA), introduced in April, enables businesses to claim 100% tax relief on capital expenditure, up to a limit of £50,000 a year.
“Even the purchase of a moderately priced tractor for, say, £30,000, could reduce profits enough to not only reduce income tax and National Insurance payments, but also to facilitate a tax credit claim,” says Rural Tax Planning Specialist Catherine Vickery.”Tax credits can be very valuable where profits are low in the year and can, depending on individual circumstances, entitle you to thousands of pounds.” The family element of child tax credit is available where income is up to £58,000, for families with up to two children. However, claims can only be backdated by three months, so if profits are likely to fall within tax credit limits for the year it is important to submit provisional claims as soon as possible, she adds. “With weakening commodity prices and the credit crunch underway this extra income could provide a welcome boost.” On the flip side, the fluctuation in profit levels created when claiming the AIA can have a detrimental impact when applying for a loan or mortgage. “Setting up to £50,000 against income in a single year means profits may swing wildly from one year to the next, particularly for farming businesses which often have high capital expenditure one year, but low the next,” says Mrs Vickery. “Farmers making a substantial AIA claim could wipe out profits altogether.” It is therefore essential to consider the timing of making such a claim so as not to jeopardise a loan or mortgage application. However, there may be ways to explain the position to potential lenders, such as including a deferred tax adjustment in the accounts, she adds. “That seems more sensible than accepting a higher tax bill just to facilitate borrowing.”
For more guidance on tax credit entitlements and AIA claims, contact Kim Davis, Tax Consultant at Old Mill Rural Services, on 01935 709338.