Tax relief measures for on-farm investment

Transcription

1 Tax relief measures for on-farm investment 3 rd May 2006 John Norris Farm Management Specialist Teagasc, Kildalton jnorris@kildalton.teagasc.ie

2 Capital allowances on farm buildings 1. Capital allowances are calculated on the net cost of the buildings 2. Net cost = (Total cost less grant paid and less VAT reclaimed/refunded) 3. Two main systems available (a) Option 1 Claim farm building allowances over 7 year period. (b) Option 2 Claim enhanced farm pollution control allowances over a 3-year period 2

3 The importance of tax relief 1. Capital allowances reduce taxable profits. 2. Tax can be saved as follows: (a) High/medium high income level (save 42% Tax + 3% PRSI + 2% levy = 47% of the capital allowance) (b) Medium/lower income level (save 20% tax + 3% PRSI + 2% levy = 25% of the capital allowance) 3. Unused capital allowances can be carried forward against future profits or can be added to a trading loss and offset against other income in the tax year (e.g. PAYE/other sources) but subject to maximum of 3 consecutive years of losses. 3

4 Capital allowances for new investment (example) 1. Gross cost of farm buildings = 120,000 Add value added tax (VAT) at 13.5% = 16, , Less the following: (a) Vat claimed back (form VAT 58) = 16,200 (b) Say grant of 60% (zone A) on maximum investment of 120,000 = 72,000 88, Net cost for capital allowances = 48, Claim these allowances over 7 year or 3 year cycle 4

5 Option 1 the 7 year cycle 1. Capital allowances claimed as follows under normal farm building allowances on net cost of 48,000. (a) 6 years at 15% ( 7,200) per year and final 10% ( 4,800) in year 7. (b) Tax savings per year (years 1-6): 7,200 at 47% = 3,384 or at 25% = 1,800 year 7 = 4,800 at 47% = 2,256 or at 25% = 1, Actual grant paid may be less than 60% due to DAF Standard Costs. 3. The investment limit for grants in FWM Scheme = 120, Tax savings help cashflow/repayments 5

6 Option 2 Enhanced capital allowances for pollution control (3-year cycle) 1. Scheme in place from 1 st January, Farm must have a nutrient management plan drawn up by approved agency or planner. REPS or Erne catchment nutrient management plans also acceptable (Section 18, Schedule 1, Finance Act 1997). 3. Buildings must be in plan and certified as necessary for the control of pollution/ 4. Submit plan to DAF, Environment Section in Johnstown Castle, Co. Wexford ( ). 5. Complete and retain record sheets for each year that farm pollution control allowances are claimed (Section 20, Finance Act 1997, Schedule 2) or REPS records. 6

7 Option 2 Enhanced capital allowances for pollution control (continued) 1. Two alternatives available: (a) Net cost = 48,000 Claim over 3-year cycle at 33⅓% per year. Capital allowance = 16,000/year. Tax saving per year = 16,000 at 47% = 7,520 or at 25% = 4,000. Advantage = quicker tax relief + improved cashflow than 7 year cycle Disadvantage = shortage of capital allowances after year 3 may lead to wasteful capital/other expenditure to get new tax allowances. 7

8 Option 2 Enhanced capital allowances for pollution control (continued) (b) Or claim up to 50% of the net cost as a floating allowance to be used as required over the 3- year cycle up to an investment limit of 100,000. The balance is spread over the 3 years at the rate of 33⅓% per year. The maximum total allowance that can be claimed in any one year (floating + normal allowance) is 50% of the net investment cost or 50,000 ( 31,744 in 2005) whichever is less. Net cost = 48,000 Year 1 = 50% = 24,000 Year 2 = 33⅓% = 16,000 Year 3 = Balance = 8,000 8

9 Other Capital Allowances 1. Land reclamation, land drainage, new fencing, new roadways, new water supply 7-year cycle (6 years x 15%/year + 10% year 7). 2. The 7-year cycle also applies to milk quota purchase at restructuring price (80 cent/gallon in 2005/2006, 55 cent gallon in 2006/2007). 3. Farm equipment and machinery (owned or hire purchase) Purchased since 4 th December 2002 = 8 year cycle at 12.5% per year. At trade-in (balancing charge/balancing allowance) 9

10 Other Capital Allowances (continued) 4. Leased machinery no capital allowances Primary lease period annual lease payments allowed. Secondary lease period various options: (continue leasing/buy-out/trade-in/sell) Risk of tax clawbacks (talk to accountant) 5. Motor cars and 4 WD vehicles: Purchased since 4 th December 2002 = 8 year cycle at 12.5%/year Limit for family cars purchased from 1 st January 2006 is 23,000 (new or second hand) and normally two-thirds allowed as business expense and one third is private use not allowed (can vary) Jeeps/pick-ups/4 WD vehicles not limited. 6. Farm repairs claim in year of expenditure 10

11 Value Added Tax (VAT) 1. VAT is charged at 13.5% by builders for construction/extension/alteration/reconstruction of farm buildings. The same rate applies to fencing, drainage, reclamation of land. 2. Machinery, plant, mobile equipment and motor vehicles are subject to 21% VAT. 3. Bulk tanks, milking machines, automatic slurry scrapers, are subject to 21% VAT but where the supplier fits/installs them on the farm and the equipment cost is under 66.66% (two-thirds rule) then the lower VAT rate of 13.5% applies. The fitting/service charges must be at least one third of total costs. 11

12 Value Added Tax (VAT) (continued) 4. Most farmers (95%) are not registered for VAT (they are flat rate farmers). 5. They are compensated for their normal VAT charges by the flat rate VAT refund of 4.8% (from 1 st January 2005) which is added to their sales of farm produce to purchasers who are registered for VAT. 6. Flat rate farmers can reclaim the VAT on fixed capital investment (buildings, fencing, drainage, reclamation) and on certain items of fixed plant (e.g. milking machines, bulk tanks, automatic slurry scrapers, cubicles, fixed cow mats). 7. Flat rate farmers cannot reclaim the VAT of 21% on mobile equipment/machinery (e.g. tractors/slurry tankers/computers/esb/tools/repairs to farm buildings and farm roads). 12

13 Value Added Tax (VAT) (continued) 8. Flat rate farmers use VAT Form 58 to reclaim the VAT. Send claims + support documentation to: VAT (Unregistered) Repayments Revenue Commissioners, Government Offices Kilrush Road, Ennis, Co. Clare Telephone: (065) VAT refunds must be reclaimed within four years of the expenditure (previously 6 years) 10. Farmers registered for VAT do not get the flat rate addition of 4.8% to their sales. They can reclaim a wide range of VAT using their normal VAT return (Form VAT 3) every two months. 13

14 Loan Interest 1. Interest rates are rising at present European Central Bank base rate (March 2006) = 2.5%. This EURIBOR Rate may rise to 3.25% - 3.5% by the end of 2006/mid The Bank prime interest rate is about 0.5% above EURIBOR rates. Banks will add a margin of 2% - 3% to EURIBOR rates or 1.5% - 2.5% to prime rates for term loans. Best customers/bigger loans negotiate better rates. Long term fixing of loan interest rates add 1% Tax relief available on bank interest + charges. 3. Long term loans most interest paid in early years. 14

15 CONCLUSIONS 1. Good tax reliefs are available for new on-farm investment (net cost). 2. VAT can be claimed back on buildings and fixed plant and equipment. 3. Negotiate good interest rate with bank for term loan finance. 4. Discuss the tax implications with your accountant before new investments are made. 15