The
increase in Annual Investment Allowance to £250,000
has been well timed with farmers heading to LAMMA this week. Businesses
thinking of spending this sort of sum on new equipment may after a miserable
harvest create a substantial trading loss.
Historically
this hasn't presented much of an issue as losses could be carried back and
relieved against other income or capital gains. From 6 April 2013 however these
reliefs will be capped at the higher of £50,000 or 25% of your income.
So if you have a year end that falls after 6 April you may find the use of any
losses created restricted.
In order
to get the most tax relief and get it quickly farmers normally want to carry
back losses or use against other income or capital gains.
If we
consider Mr & Mrs Barley who have a 30 April year end we can see the impact
of this.
In their
accounts to 30 April 2012 the Barley's made £250,000.
The tax that is due on this would be £86,252, plus £9,577 in national insurance. This would all be due on 31
January 2014!
In their
accounts to 30 April 2013 they make a £200,000 loss after capital
allowances. Under the old rules they could have claimed for this loss on their
2012/13 tax return and reduced their tax payment in January 2014 to £9,890.
As their
year end falls in the 2013/14 year they will have their use of losses
capped. This means that the Barley's can
only claim £100,000 of the losses against
their previous years profit. This will mean they have a tax & NIC bill of £47,346.
They will
be able to average when they complete their 2013/14 tax return but this will
only save a further £8,061, reducing their total
liability to £39,284.
Because
they have already used £50,000 of losses, by carrying
back, their unused losses of £100,000 will have to be
carried forward against future farming profits, and not too many forecasters
are expecting the 2013 harvest year to be a bumper one.
The
effect of this is to increase the total tax bill on the combined 2012/13 and
2013/14 profit / loss by £29,394.
So when
tempted by that new piece of kit and the generous tax allowances make sure you
work out exactly how it will impact your business and cashflow.
If you
find yourself in this position you may want to look at other options to improve
the situation.
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