Agricultural Capital Allowances: Tax Guide for Farm Buildings

As farmers face rising costs on all fronts, any additional tax savings can be critically important. Capital allowances are one form of completely legitimate tax relief that can be under-claimed, or sometimes even missed altogether.

In the past, there were special tax rules for agricultural (and industrial) buildings. Today, farmers must use the same rules as other businesses when claiming tax relief by way of capital allowances.

Plant and machinery allowances (PMAs) offer valuable and fast tax relief, often giving a full tax deduction for the year in which the expenditure is incurred. Even though the main rate of writing-down allowances fell in April to 14%, that does not affect most capital allowances claims.

For some buildings and fixed structures, a top-up claim (giving additional relief, but at a slower rate, and with possible consequences down the line) may be possible by making a claim for structures and buildings allowances (SBAs).

Some plant and machinery is obvious to spot. Farmers routinely claim PMAs for tractors, lorries, harvesters, excavators and other heavy machinery. Also for cars (subject to any private use adjustment), office equipment, and so on.

But these obvious items are just the starting point. PMAs are also due for part of the cost of a building.

Virtually every farm building includes plant and machinery on which allowances can be claimed, usually giving immediate tax relief on the full cost of the items in question. This includes all hot and cold water systems, entire electrical systems, alarms, sanitaryware, cooking facilities, and much more.

If a building is being newly constructed or extended, a significant part of the cost will qualify for PMAs. The remainder will mostly attract SBAs (the main exclusion being for land costs, if there are any).

The claim can be formulated after the construction is complete – even years later – but an early capital allowances analysis may even allow for improved cash-flow forecasts, and therefore lower borrowings.

The rules work differently for existing buildings that are bought, but it is still possible to claim PMAs for the same items. In this case, though, it is necessary to have an in-depth conversation with the seller, and to sign and submit a “fixtures election” under section 198 of the Capital Allowances Act 2001.

It is much better for the parties to have a discussion about capital allowances before contracts are exchanged, as tax relief may otherwise be permanently lost for both seller and buyer. Sometimes the seller has to take action to protect the capital allowances position of the buyer, so the contractual wording must ensure that the seller meets this “pooling requirement”.

An early discussion also gives both parties certainty on the capital allowances aspect of the transaction, as the fixtures election is binding on everyone, including HMRC, as long as it is properly drawn up in the first place.

Particular issues arise for professional costs, site preparation and other peripheral expenditure, and it is necessary to determine whether such costs are “on the provision of” plant or machinery. A Supreme Court ruling (Orsted) released in April has changed the correct approach to such expenses, and professional guidance here will secure the best possible legitimate outcome.

Another case – May, reported in 2019 – showed that exceptional claims may be made in certain circumstances. The tax tribunal in that earlier case found that an entire grain store (not just the mechanical parts) could properly be claimed as plant.

At Six Forward, we successfully applied that earlier case to achieve the same result on a similar type of store, gaining much earlier tax relief than would otherwise have been the case. Indeed, creating valuable claims is what we do, all day every day. And to prevent any problems with HMRC, our first step is always to check whether a legitimate claim can be made.

So if you have built, bought or extended a property on your farm, why not let our team take a look and give you an honest appraisal? Our review won’t cost you a penny, and you will be under no obligation.

If no allowances are due, we will explain why not.

But if there are opportunities for you to save tax, we will spell out how it will work. If you then choose to instruct us, we will work alongside your existing accountant, providing the exact details to include on your tax return, accompanied by a full technical analysis showing the legal basis on which the claim can be made.

Can I claim for professional costs and site preparation as qualifying expenditure?

Yes, but it requires careful technical analysis. Capital expenditure isn't just about the physical bricks and mortar; it can also include professional costs and site preparation. However, following recent UK rulings, the way these are allocated to plant or buildings has become more complex. Whether you are building new offices or a grain store, our team ensures every point of your expenditure is correctly categorised to maximise the relief you receive. If you are unsure about what qualifies, our capital allowances specialists can review your project costs to secure the best possible outcome.

How does the Annual Investment Allowance (AIA) impact my claim?

The Annual Investment Allowance is one of the most powerful tools for farmers. It allows for a 100% deduction on the costs of plant or machinery in the period the expenditure is incurred, up to a set limit. This means that instead of claiming relief on a reducing balance basis over many years, you can often offset the full cost against your profits in year one. This represents a massive tax saving and immediate cash-flow improvement for any qualifying activity.

What are capital allowances for agricultural buildings, and how do they provide tax relief?

Capital allowances for agricultural buildings are a vital form of tax relief that allows farmers to deduct the expenditure incurred on construction, investment, or purchase in calculating their taxable profit. Unlike depreciation in accounts, which is not tax-deductible, these allowances provide a legitimate way to reduce your tax position and the overall cost of your capital expenditure.

What happens to capital allowances when there is a new owner or a sale?

When a property changes hands, the purchaser and the owner must reach an agreement regarding the value of the fixtures. To ensure the new owner can claim, a formal tax agreement must be signed to fix the value of the claimed items. Without specific guidance and the correct contractual wording during the sale, the tax relief can be lost forever. It is important for both parties to establish their position before contracts are exchanged to protect their investment.

What is the Structures and Buildings Allowance (SBA), and when does it apply?

For parts of the farm buildings that do not qualify as plant and machinery, such as the walls, floors, and even fencing, you may be entitled to the Structures and Buildings Allowance (SBA). Introduced in April 2019, the SBA allows for writing down the cost of a building or structure at a fixed annual rate. While it is slower than the higher rates available for plant, it ensures that almost the entire construction cost (excluding land) is eventually eligible for relief.

Which items qualify as plant and machinery within farm buildings?

While capital allowances are commonly claimed for obvious items of machinery like tractors or harvesters, much of the fabric of a building also qualifies as plant. Qualifying expenditure includes integral features such as electrical systems, heating, and water systems. Under current legislation, these items are typically placed in the main pool or special rate pool and can attract allowances that provide immediate tax savings to the business. If you are unsure about what qualifies, our capital allowances specialists can provide a full appraisal to ensure no eligible item is overlooked.