Finance notes February 2010

Make best use of your capital allowances in building projects

Are you planning to do a building project on your farm?

Before you start, it would be worthwhile arranging a consultation with your accountant to discuss how the project will be treated in relation to income tax. They will help you decide if your building project is:

A renewal / repair of an existing asset; or
An improvement.

All the cost associated with repairs and renewals attract 100 percent immediate deduction in your tax accounts and include items such as painting, roof replacements and cubicle replacements.

Improvement works require more careful planning to make best use of Capital Allowances. While tax relief on agriculture buildings is being phased out by March 2011, some components of a building project can be classified as plant and machinery and attract Capital Allowances. Indeed some projects in their entirety can be regarded as plant. These include:

Slurry stores
Silage clamps
Pig arcs and calf hutches
Feed barriers

The present rules provide for 100 percent tax relief on the first £50,000 spent on plant and machinery. Above this threshold there is 20 percent relief per annum on a reducing balance basis.

Slurry tanks are classified as plant and qualify for Capital Allowances

Other elements of your building project could be designated as ‘internal features’. These include items such as electrical systems, cold water systems, ventilation and heating systems and floors and ceilings comprised in such systems. They attract 10 percent relief per annum on a reducing balance basis if they cannot be included in the 100 percent relief claim on £50,000 mentioned above.

Explore if you can incorporate energy saving plant and machinery into your project. Not only will this equipment save you money in the longer term, it will help you reduce your tax bill as there is 100 percent relief on many of these items

Once you have met with your accountant and planned out your project, keep good documentation on the build so that all the costs can be easily identified and categorised.

Know your borrowing requirements

Increasing oil prices seem to be pushing up the prices of many inputs, such as fertiliser. Higher input prices can quickly put pressure on the working capital requirement of your business. Where this is funded through borrowing it is important that you are realistic about the peak borrowing and negotiate a sufficient overdraft facility. You are in a difficult negotiating position if you are at your borrowing limit and facing the prospect of penalty charges!

In preparation for meeting with your bank:

Have the latest annual accounts prepared soon after the year-end.
Benchmark your business to show how your business is performing against similar businesses.
If you are changing your system, prepare a cash-flow for the next 12 months.
If an increase in borrowing is required, approach the bank well in advance so you have time to consider alternative options.
Make sure your borrowing is properly structured. In general an overdraft facility should be used for working capital. Other longer term investments for land, building or machinery should be financed over a longer term that does not exceed the lifespan of the asset.
Consider other forms of finance such as hire purchase, but always get a number of quotes so that you can compare terms.

Submitting VAT returns online

From 1 April 2010 businesses which have an annual turnover of greater than £100K on the 31 December 2009 will have to submit their VAT return online. All new business first registered after 1 April 2010, regardless of turnover, will also have to submit their VAT return online. The process for registering for VAT return online is explained on HM Revenue and Customs website: www.hmrc.gov.uk

. CAFRE is organising short courses to help farmers use this online form and to introduce them to other useful online forms. If you are interested in attending contact Roisin Watt on 028 9442 6819.