Tax relief on farm repairs and new equipment

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As we are approaching the end of summer it is always worth keeping one eye on the likely tax bills at the end of the year. Clearly this has been an exceptional year and a lot of plans have had to be put on hold. A lack of agricultural shows and other events have also perhaps reduced the inspiration for farm improvements this year.

Here I will look at the changes to tax relief on capital expenditure and draw attention to an interesting tax case concerning property repairs.

Capital Allowances

Since 2012 we have had a system of Annual Investment Allowances (AIA) which allows businesses to claim 100% tax relief on expenditure each year up to a certain limit. This limit changed on a regular basis until 2016 when a “permanent” figure of £200,000 was introduced. However, a temporary increase to £1 million per year was introduced for the two year period 1^st January 2019 to 31^st December 2020 and this is due to revert back to £200,000 on 1^st January 2021.

Most farming businesses do not spend £200,000 - let alone £1 million - so it might be assumed that this won’t affect many businesses, however, things get more complicated where a business prepares accounts to a date other than 31^st December each year.

Let’s look at a typical business with a 31^st March accounting date:

For the 2021 accounting year we have an apportioned AIA limit: 9/12 x £1 million + 3/12 x £200,000 = £800,000 (as the legislation dictates that this is split into two notional periods, each with its own AIA limit.)

Whilst it is normal for businesses to defer capital expenditure until near the end of their accounting period as 100% relief is usually due regardless of the date of expenditure, in this example however, only £50,000 of expenditure in the period 1^st January 2021 to 31^st March 2021 is eligible for 100% relief. Thus a business planning £100,000 of expenditure before the end of their accounts year will need to incur £50,000 before 31^st December to maximise tax relief.

There is a further complication when distinguishing whether the expenditure is on equipment which qualifies for AIA or a writing down allowance of 18%, or on a building which qualifies for lower rates of relief.

It is important to carefully analyse expenditure on a building as there are different rates of tax relief:

• Equipment which qualifies for 100% AIA or 18% writing down allowance as explained above.
• Integral features – typically electrical fittings, water fittings, air conditioning, and ventilation – 100% AIA or 6% writing down allowance.
• Structure of building, which essentially is everything which didn’t qualify under the two categories above. Until October 2018 there was no tax relief on such expenditure, but the Structures and Buildings Allowance was introduced at a rate of 2% per year, which was increased to 3% in 2020. This is not overly generous but can reduce tax bills by a modest amount.

Farm Repairs

In most cases it is easy to identify repair expenditure and the cost is deducted from profits in the year. For larger projects the dividing line between a repair and improvements is not easy to identify. This was the position in a recent tribunal case concerning £74,000 spent renewing and resurfacing a haulage yard.

The haulage company’s position was simply that the expenditure returned the yard to its original condition and it was therefore a repair. HMRC argued that the scale of the work meant that nothing would need to be spent on the yard for many years and that it was therefore capital expenditure. Back in 2015 when the work was done, there would have been no tax relief for improvement expenditure.

It is important to note that there was no difference in terms of useable area or load-bearing capacity of the yard as a result of the work. Some tax tribunal decisions run to dozens of pages, but the judge in this case only took 4 pages to dismiss HMRC’s arguments and allow the claim for repairs.

This is obviously good news, but it took from 2016 when HMRC first challenged the deduction until July 2020 when the decision was announced, to resolve the matter. As well as the uncertainty over the tax bill, there will also have been the cost of professional fees to fight the case. In some cases the amount of tax at stake is relatively low and the outlay required to challenge HMRC decisions is not justified. This is where we would always suggest to clients that they commit to a small annual cost to pay for protection to cover professional fees, as this will enable their business to challenge HMRC in scenarios such as this and help achieve the tax deduction they are entitled to.