Information Leaflets

PURCHASING EQUIPMENT TAX EFFICIENTLY

PURCHASING EQUIPMENT TAX EFFICIENTLY

CAPITAL ALLOWANCES

Are You Timing Purchases of Equipment Tax Efficiently?

You’re working out budgets for the next financial year and they include significant purchases of equipment. Naturally you want to ensure you obtain the tax deductions for these as soon as possible.

How can you ensure you achieve this?

The Annual Investment Allowance

Since 1 January 2016 the annual investment allowance (AIA) has been a permanent tax break.

For most small and medium-sized businesses that means they can claim a tax deduction, as a capital allowance (CA), for the full cost of equipment (up to £200,000 per annum) in the financial period in which it’s purchased rather than it being spread over many years. The trouble is there are situations where the timing of a purchase can delay the tax deduction.

Deferred Payment = Delayed Tax Relief

A special rule applies where payment for equipment isn’t required immediately by the sell.   It means you can only claim CAs, including AIAs, for goods once they belong to you.  Normally this doesn’t pose a problem because ownership of the goods starts from the time there’s an unconditional obligation to pay for them, and typically the date of the invoice or purchase order creates that obligation, but not always. For example, in the case of a hire purchase, ownership doesn’t pass to the buyer until the end of the contract, consequently CAs can be delayed.

 

Trap   Where the purchase agreement allows for all or part of the cost to be paid later than four months after the purchase becomes unconditional, i.e. when you’re legally committed to go through with it, CAs can only be claimed for the financial year in which the equipment is put to use in your business.

Example   Acom’s accounting year end is 31 December.  On 1 December 2016 it commits to buying a bespoke IT system.  The purchase contract requires Acom to pay £5,000 at the time of the order and the balance of £30,000 when the system has been installed.  The installation is completed on 30 April 2017.  Acom can claim CAs of £5,000 in its financial year to 31 December 2016, but must wait until the next year to claim for the £30,000.

 

Tip 1. When agreeing terms for large purchases of equipment near the end of a financial year, keep in mind the four-month rule.  If the timing of payment is going to cause CAs to be pushed into the next financial year, consider asking the supplier, say in the purchase agreement, that payment is required within four months irrespective of the delivery date.  Even if payment is made later than this, CAs can be claimed in the financial period in which the purchase contract is signed.

 

Tip 2.  If Tip 1 isn’t possible, plan purchases that involve payments falling more than four months after you’ve committed to buy so the equipment is delivered and put to use in your business within the same financial year. In other words, avoid making this type of purchase close to your financial year end.

 

Tip 3.  If Tips 1 and 2 aren’t feasible, simply paying for the equipment earlier than the supplier requires can ensure you obtain CAs in the corresponding financial year.

 

Planning  The key message is that planning your purchases of equipment around the tax rules is important. It can ensure you receive the earliest possible tax relief and therefore also improve your cash flow.

 

Tax deductions, i.e. capital allowances (CAs), are triggered when you commit to the purchase, except to the extent payments are due more than four months later, e.g. in an HP agreement.  In that case CAs arise when the equipment is first used in your business.  So plan these purchases early in your financial year.

 

Tips and Planning

Tips and Planning

Tip 1. When agreeing terms for large purchases of equipment near the end of a financial year, keep in mind the four-month rule.  If the timing of payment is going to cause CAs to be pushed into the next financial year, consider asking the supplier, say in the purchase agreement, that payment is required within four months irrespective of the delivery date.  Even if payment is made later than this, CAs can be claimed in the financial period in which the purchase contract is signed.

 

Tip 2.  If Tip 1 isn’t possible, plan purchases that involve payments falling more than four months after you’ve committed to buy so the equipment is delivered and put to use in your business within the same financial year. In other words, avoid making this type of purchase close to your financial year end.

 

Tip 3.  If Tips 1 and 2 aren’t feasible, simply paying for the equipment earlier than the supplier requires can ensure you obtain CAs in the corresponding financial year.

 

Planning  The key message is that planning your purchases of equipment around the tax rules is important. It can ensure you receive the earliest possible tax relief and therefore also improve your cash flow.

 

Tax deductions, i.e. capital allowances (CAs), are triggered when you commit to the purchase, except to the extent payments are due more than four months later, e.g. in an HP agreement.  In that case CAs arise when the equipment is first used in your business.  So plan these purchases early in your financial year.

 

 

Leaflets

Below you will find a selection of information leaflets to download.  If you are looking into any issues that may effect your business, lettings, investments or personal taxation issues, we are here to help.  Whether you are wondering how to go about becoming self-employed or forming a limited company or if your investments are as tax efficient as you can make them, look no further.

Our most popular requested leaflets are available for immediate download, but if you cannot find what you are looking for there, then have a look at the Information Leaflets Contents List for details of all the leaflets we have available.  If you would like any of these titles contact us to request full details.