Agri-businesses urged to consider investments after ‘significant’ tax changes

Agricultural businesses need to carefully consider their investment options after the spring Budget introduced several significant tax changes, says rural accountancy firm Old Mill.

The spring Budget on March 3 introduced a lot of new legislation for farmers to take on board, with some of it looking attractive at first sight, but they should be taking a cautious approach, advised Catherine Vickery, associate director at Old Mill.

She said: “On the surface the new super-deduction – which allows an uncapped 130% capital allowance on plant and machinery – looks really exciting, but on closer inspection it’s smoke and mirrors.”

Those who have a five-year investment plan of over £1 million per annum – the Annual Investment Allowance (AIA) cap – should consider bringing it forward to take advantage of the super-deduction which runs from April 1, 2021 to March 31, 2023, as it has no spend cap, she explained.

“Anyone planning to buy something imminently should hold off until after March 31, 2021 to qualify.”

Increase in corporation tax

However, the increase in corporation tax from 19% to 25% in April 2023 is going to be a shock for many companies, said Vickery.

It looks to be only 6p more in every £1, but it’s an increase of over 30%, so if you had a £100,000 tax liability, it will now be over £130,000. When you deduct that extra money from your profits, it’s that much less to pay off debt or draw out of the business.

“The government wants businesses to be thriving and producing profits ready for this change – which highlights just how much corporation tax is going up.”

The increase in corporation tax means any benefits from the super-deduction could be nullified, especially for those investing less than £1 million.

“The 130% super deduction, combined with the current corporation tax of 19%, means that for every £100,000 you spend, you get £24,700 back in reductions,” explained Vickery.

But if you wait two years and have to pay corporation tax at 25% with no super-deduction, a £100,000 expenditure would allow for a tax reduction equaling £25,000.

“So everyone is getting excited but when you run the numbers, it’s much of a muchness, meaning anyone investing below £1 million may be better to stick to their current investment plans,” she concluded.