Last year to capitalise on higher plant and machinery tax allowances

With the 2011 harvest outlook for Scottish arable farmers looking good and indicative prices higher than last year, early tax planning is essential to take advantage of the tax Annual Investment Allowance (AIA) of £100,000 before it drops next year to £25,000, says Robin Dandie, Head of Farming for Johnston Carmichael.

Up to 05 April 2012, farmers can write off up to £100,000 against taxable profits if they purchase qualifying machinery. As well as covering the usual tractors, combines and implements, some expenditure on buildings may also qualify for the relief.

However, if purchasing on Hire Purchase (HP), buyers need to note that the allowance is claimed on the full cost price in the year of purchase and future HP instalments will not reduce tax liabilities in the year they are paid.

Therefore the situation can arise that a low tax bill will be payable when the machinery is first purchased and higher tax liabilities are payable in future years when the HP payments are still being made, leading to the potential for cashflow problems. This needs to be planned for in advance to avoid stretching bank facilities.

Farmers also need to be aware that with a specific cut off point for the tax allowances they need to ensure that machinery can be supplied to them in time to claim the allowance. If this is left too late they may find that machinery dealers are unable to make delivery due to excess demand.

It should be noted that the purchase of any plant and equipment should be based on sound business requirements and decisions should not be taken based purely on tax relief.

Johnston Carmichael is Scotland’s largest firm of chartered accountants and business advisers with over 11,000 clients and 420 staff in 10 offices in Scotland and acts for over 1,500 farming clients.