WOULDN’T it be great if there
was an easy way to decide when
and how to finance the purchase
of equipment at your practice?
There are no hard and fast rules
as to what is best, although the aim
of this article is to provide you with
a guide of
things to
consider.
The tax
position for vehicles is
different and
we will look
at these in a
future article. Space dictates that we
do not cover the rules on expenditure
on properties in this article – they are
worthy of consideration in their own
right.
What options are available?
It is important that you consider how
equipment will be paid for. Typical
ways are: cash; hire purchase; loan,
for example from a bank; finance
lease; operating lease (sometimes
known as contract hire).
Before considering the tax
position, it is worthwhile thinking
about whether you wish for the
practice to own the equipment, as if
the answer to this is no, then
generally an operating lease will be
most appropriate.
Matters such as:
n how quickly the equipment will
become outdated,
n how much it will be worth after a
number of years, and
n its expected reliability and
therefore potential maintenance costs
are all important considerations when
deciding whether the practice is to
own the equipment or not.
You should be aware that some finance providers may provide a
“lease hire” that could be either a
hire purchase, finance lease or
operating lease, depending on the
wording of the agreement. You
should ensure that you take advice
from your accountant where it may not be clear as the tax and accounting
treatment are quite different!
Cash
Using cash to purchase equipment
outright can be the best option if
there is spare money in the bank as it
avoids incurring interest payments
and arrangement fees that may be
payable under the other financing
options.
It is, of course, worthwhile
factoring in any such expenditure
into your practice’s budget, so that
cash flow is well managed.
One hundred per cent tax relief is
available in the year of purchase
(based on the invoice date) on the
excluding VAT cost of plant and
machinery for the first £250,000 of
qualifying expenditure each year. This
is with the benefit of the Annual
Investment Allowance (AIA).
There is no HMRC definition of
what is classified as plant and
machinery, although generally most
equipment used in a practice will
qualify as such.
The AIA is a form of capital
allowance.
Change in the Budget
The Chancellor announced in the
recent Budget that the AIA increases
to £500,000 per annum with effect
from 1st April 2014 (companies) and
6th April 2014 (sole traders,
partnerships and LLPs) up until 31st
December 2015.
This is great news, as he had
previously indicated that the AIA
would reduce to £25,000 from 1st
January 2015!
Accounting periods that straddle
1st April 2014 (companies) or 6th
April 2014 (sole traders, partnerships
and LLPs) will have their AIA
allowance pro-rated. Transitional
rules will apply although these should
generally only impact on practices
that exceed the current £250,000 AIA expenditure threshold.
If the AIA is exceeded (which is unlikely in most cases given the
significant increase in the threshold
although, of course, this may change
in the future), the practice will still
receive tax relief through capital
allowances but at a reduced rate of
18% on a reducing balance basis,
meaning that it will be several years
until the majority of tax relief is
received.
Where a partnership has a
company as a partner, i.e. there is a
corporate partner, the partnership is
not able to claim the AIA. However,
where there is such a set-up, the
corporate partner itself may qualify
for the AIA where it incurs capital
expenditure.
Not all capital expenditure
qualifies for the AIA, including, for
example, expenditure
on cars (although
commercial vehicles
should be covered –
you should consult
with your accountant)
and fixed structural
items such as walls.
If you are
planning significant
capital expenditure on,
for example, an
extension or
refurbishment, it pays
to speak to your
accountant to ensure
that you understand
when and at what rate
tax relief will be
received.
When buying with
cash, VAT is reclaimable in full
when the equipment is
purchased.
The depreciation charged in the
accounts is not tax deductible,
although relief is available for capital
allowances as detailed above.
The practice is responsible for
maintenance costs.
Hire purchase (HP) or taking
out a loan
A hire purchase agreement is
essentially a loan secured against the
equipment being purchased and is
therefore similar to taking out a bank
loan to finance the purchase if
security is also taken.
This method of purchase is better
suited for practices that either don’t
have the spare cash to purchase
outright, or have other plans for the
cash currently held in their bank
account.
The practice owns the equipment
and is therefore responsible for all maintenance costs.
The capital allowances and VAT position is the same as if the
equipment was purchased in cash,
with the exception that the
acquisition date for tax purposes is
the date that the equipment is
brought into use, i.e. it must have
been delivered before the year end
for a tax deduction to be available in
that period.
This could therefore have cash
flow advantages as the VAT can be
reclaimed without having to pay any
cash at that stage. That said, in many
cases the deposit required on a hire
purchase agreement is equal to the
amount of VAT reclaimable on the
equipment.
Tax relief is also available on the
interest payments made on the hire
purchase/loan agreement (not the capital repayments) as
and when the
repayments are made.
Finance lease
This arrangement
typically works whereby
the practice pays rentals
over a fixed term and
may have the option to
pay a one-off payment
at the end of the term
to obtain ownership of
the equipment.
Capital allowances
including the AIA are
not available for finance
leased assets. Instead,
tax relief is available
for the depreciation
and interest over the
life of the equipment.
VAT is reclaimable
when repayments are
made.
Whether or not maintenance
cover is provided will depend on the
wording of the agreement.
Operating lease (sometimes
also known as contract hire)
Under this type of arrangement, the
practice would not actually own the
equipment but would be “hiring” it
from the provider.
No capital allowances are
available. VAT is reclaimable when
payments are made. Tax relief is
available on the excluding VAT
payments made.
Some operating leases have
maintenance cover included as part
of the payments, although this is not
always the case.
Private use
It is worth pointing out, that if there
is any private use of the equipment, then where VAT is being reclaimed, it
should be reduced by the percentage
of private use.
In practice, this is more likely to
apply to vehicles than equipment.
Summary
You should ensure that you consider
whether you wish for the practice to
own the equipment or simply hire it
and return it at the end of a lease
term.
Given that the AIA had
previously been expected to be
reduced, the increase announced in
the recent Budget is without doubt
great news for practices.
The most favourable option from
a tax perspective is generally either to
purchase with cash/loan or on hire
purchase. However, cash flow is also
an important consideration.
Whilst operating leases and
finance leases may sometimes appear
“cheaper” on the face of it, the cash
flow advantages of buying outright,
taking out a loan or using hire
purchase (i.e. VAT reclaimed in full
and generally more tax relief in the
first year) could outweigh this. This
will obviously also depend on the
terms offered by each provider.
