It’s that time of year again, the nights are long and it’s the start of a new year. Whilst the thought of harvest 2020 is a particularly daunting one given the horrendous conditions affecting autumn drilling, you may be thinking ahead to machinery requirements, keen to take advantage of off-season deals. Such deals often see expensive equipment purchased on hire purchase agreements or similar arrangements. Here, we explore the Capital Allowances Act (CAA01/S67) which can mean that the tax relief available on such purchases is not always as expected.
How do I qualify for Plant and Machinery Allowances?
For machinery purchases to qualify for Plant and Machinery Allowances (PMA), the person looking to claim the allowances must own the machinery at some time in that chargeable period. Under many hire purchase agreements, there is an option to acquire the legal title at the end of the contract. This means that the person does not technically own the machinery until this payment is made at the end of the contract.
This is where section 67 steps in. Section 67(2) notes that the machinery is to be treated as owned by the person at any time when they are entitled to the benefit of the contract. This allows PMAs to be claimed as each payment is made, throughout the contract. Furthermore, Section 67(3) allows PMAs to be claimed on the future payments when the machinery is brought into use for the purposes of the qualifying activity i.e. the trade. If this is in the same chargeable period as the hire purchase agreement is entered into, full allowances can be claimed in that chargeable period. If the item is brought into use after the year end, the PMAs would be claimable across different chargeable periods.
In practice, whilst the Annual Investment Allowance stands at £1,000,000, obtaining full PMAs in the earliest possible chargeable period is likely to accelerate the tax relief available. For day-to-day machinery such as tractors, the ‘brought into use criteria’ is easy to achieve. For more seasonal machinery such as combines and balers, where chargeable periods end in the spring (31 March / 5 April, for example) if acquired in an off-season winter deal, the likelihood is that the kit will not have been brought into use at the year end. As a result, PMAs will only be available on the payments made.
What if I part-exchange farming machinery?
It is also crucial to take into account that if machinery is part-exchanged as part of the deal, the value given for the part-exchange is taken into account when calculating the PMAs for the chargeable period. It may be that the trade-in value triggers a balancing charge and is effectively added to the taxable profits for the year.
Purchasing machinery is a huge financial commitment and when timed right can be extremely tax efficient. There may be actions you can take, such as alternative finance, to optimise your tax position. Make sure you take advice before signing any deal to ensure you are in the best tax position possible.
Please contact Kerry O’Reilley on koreilley@ellacotts.co.uk or 01295 250401 for more information about how to buy machinery in the most tax efficient way.
Find out more about our market leading farming and agricultural accounting services.
