Farmers should think hard before incorporating their business to take advantage of investment allowances, says Ryan Lincoln of Norfolk-based accountancy firm Lovewell Blake.
There was little specifically for farmers in last month’s budget, but given that agriculture is a capital-intensive industry, the whole question of investment allowances is certainly relevant.
Last week saw the end of the "super deduction", which for two years allowed businesses to reclaim 130pc of capital investment, with no annual limit.
However, this was only for new equipment (not secondhand or leased) - and was only available to incorporated businesses, which ruled out a lot of farming concerns, many of which are partnerships or sole traders.
That’s an important point, because the big announcement on investment allowances in Jeremy Hunt’s March budget was that he is to allow 100pc expensing of capital purchases, with no annual limit once again.
However, the same restrictions apply to this as they did to the super deduction.
Unincorporated businesses can take advantage of the Annual Investment Allowance, which allows full expensing of capital expenditure – including non-new and leased kit – up to a now permanent level of £1m a year (at one stage this was due to be reduced to £200,000).
Bigger farming businesses can easily exceed that £1m limit in any one year – so should they be considering becoming limited companies?
While the ability to take advantage of unlimited 100pc expensing might be attractive, there are other considerations, including the effect on capital taxes (potentially issues surrounding the farmhouse), the fact that existing debt may need to be renegotiated with your bankers if you become a new legal entity, and the administrative burden of these changes with customers, suppliers and professional bodies.
Incorporation may be the right move for a small minority of agricultural businesses, but these are generally for a strategic decision to perhaps separate enterprises, or for the larger, high-yielding businesses.
No matter how attractive the investment allowances might seem, it’s important not to let the "tax tail wag the dog". Incorporation needs to be done for the right reasons.
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