There will be times when a business decision requires the endorsement of a professional, adviser, especially an accountant, who should already know their customer’s exact tax position. Most accountants, tax advisers, finance brokers and IFAs, (Independent Financial Advisers), will be pleased to provide professional advice and it is recommended this advice is always sought.
Most major business expenses are linked to new equipment or other premises’ costs.
As technology improves, and new diagnostic equipment is developed, there will always be times when new equipment is required. Care should be taken in deciding how to pay for and account for the purchase of new equipment, especially if it is likely to increase profit levels in future years. Using cash, loans or HP will ensure high initial First Year Tax Allowances may be claimed and all the options should be explored.
Specialist Lease Finance will offer a spread of tax benefits over the whole term of the contract. Leasing enables a ‘drip-feed’ of tax relief, and this usually spans the contract term, which is typically 2-5 years. This rather neatly offsets future profits as a business operating expense and all at maximum tax rates. Leasing is usually ideal for new start practices.
In an ideal business environment, you should be leasing any equipment or goods that depreciate. This allows any spare cash to be used for more beneficial purposes, such as pension top-ups, general business expenses, or paying off lump sums towards longer-term business loans.
Note from John Baker
I keep up-to-date with tax matters including changes in Annual Investment Allowances and this includes identifying assets that may qualify for Annual Investment Relief.
My key area of expertise is a deep understanding of Finance Leases and HP and when and how to use these facilities to their best effect.
All advice provided by me is offered free of charge unless otherwise stated.
I welcome enquiries about tax mitigation and general finance planning from new and existing customers.
Tips on Tax Planning
- Before using business cash reserves and before taking out a bank loan, consider using leasing or HP to pay for Equipment, Plant & Machinery.
This will help to preserve vital cash for use elsewhere and is less likely to affect your credit status with other lenders.
- Seek advice about the more effective use of business cash reserves and perhaps consider:
- Making a pension top-up payment just prior to a tax year end
- Making a lump sum reduction payment of a large / existing business loan
- Use the cash for other business opportunities or prospects that may arise
- Investing in new medical equipment often leads to improved treatment service and enhanced future profits. It makes sense to lease new equipment, which is treated as an annual operating expense during the whole life of the lease. All monthly repayments can then be offset fully against future profits, which directly reduces tax. New start practices, for example, make little or no profit in early years and should especially take heed of this advice.
Most new businesses benefit from steadily increasing income levels, so the unique tax allowances provided by leasing can be of major benefit.
- Annual Investment Allowance (AIA) enables any Plant, Equipment and Machinery to be offset against income in the year it is purchased and up to an allowable threshold which could be over £250,000 in any tax year. However, by electing to take the full AIA, the benefit will be mostly taken in the year of the purchase.
Consider leasing to spread tax relief.
- Professional advice on future investment and the purchase of all Plant & equipment should be sought regularly from your accountant. If you make the wrong decision, a lower tax benefit will apply, called Writing Down Allowances (WDA).
This could mean it takes 6-8 years to write off the purchase and claim the taxable benefits.
- Leasing and Lease Finance agreements enable 100% of all payment made to be offset against taxable income as a business operating expense. This is a proven tactic to mitigate annual business profits and is payable for the life of the finance agreement.
In some cases leases can be backdated or lump sums can be made to take into account full annual tax benefits.
- Do not forget, at the end of a finance lease the goods can usually be purchased by special arrangement with the broker or lender. Ask your broker about this clause before the main term of the lease is completed.
Then, after you gain outright ownership of the equipment, ask your accountant to consider recapitalising the equipment into the Balance Sheet of the business.
Advice provided on tax planning is for illustration purposes and the above guide represents a general overview. Professional advice should always be sought before making any major financial decisions.