Will loss cap reduce the benefit of increased Annual Investment Allowance?

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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