Purchasing a new business asset pre-year-end can be a positive way to put a dent in the tax bill. If you buy a qualifying asset it will lower taxable profits, and save tax at anything from 19% to 60% depending on the circumstances. It will always cost you 100% though, so you should only buy it if absolutely necessary for your trade.
By qualifying asset, I mean something which will be owned and kept for use within the business such as equipment, machinery, or vehicles.
How you should buy it isn’t quite so simple, and the options become more involved as the price goes up. Moreover, the tax consequences vary significantly depending on whether you own or lease the asset.
Proceed with caution if trying to apply the below to the purchasing of cars, especially high-performance ones! As a rule, it pays to check in with your tax advisor before buying a car as they are not terribly popular with the axman. As a brief overview a van will qualify for capital allowances (see below) whereas a car will attract differing rates depending on which of the following CO2 emission brackets it falls into.
If you are a sole trader or partner, you may need to reduce the amount of tax relief claimed for personal usage.
The list of cars qualifying for 100% allowances isn’t especially long, but things have moved on from a few years ago when the only cars qualifying were the ones which can be parked either way round like Smart cars and G-whizzes. Today you can get 100% allowances if selecting the correct electric or hybrid version of certain Audi A3’s, BMW 3 series and Mercedes-Benz C-classes. The website nextgreencar.com provides some useful lists.
BUY IT USING BUSINESS MONEY
Capital allowances – the taxman’s version of depreciation will be available, and generally speaking if within the annual investment allowance (AIA) limits (currently £200,000 a year) the full cost will lower your taxable profits. The Autumn Budget announced a significant increase to the AIA limit with it set to rise to £1million from 1 January 2019. Before getting the cheque book out in the January sales, however, be sure to consider your business’ year-end. If your accounting year straddles the change you will get an AIA limit which is an amalgamation of the two rates, but is effectively split into two very distinct periods. For example, if your year end is 31 March 2019 your AIA limit will be £400,000, however, this will be split between £150,000 for 1 April to 31 December, and £250,000 between 1 January and 31 March adding a little more complexity to year-end planning.
DIP INTO THE OVERDRAFT
Not always advisable, but in many cases, an overdraft facility can be relatively cheap and easily accessible. Interest suffered can be offset in full against taxable profits and as above capital allowances are available.
BUY IT USING PERSONAL MONEY
If you’re lucky enough to have surplus money outside of the business then you could lend this to the business to purchase the asset and then charge interest on the loan. The business will receive capital allowances, and if the interest can reasonably be restricted to the savers’ rates, and you have little or no other taxable interest income then the business will get full tax relief whilst you personally suffer no tax on the interest from the business.
This can be a good way to really dent tax payable whilst spreading the payment over a long period. Under a hire purchase agreement where you take ownership of the asset at the end of the agreement you will get capital allowances when the asset is in use, and on the total cost price whereas payment is made over the lease term. Whilst you get no tax relief on subsequent repayments the interest element of the monthly repayments is tax deductible.
This is where you effectively hire an asset and pay a rent over a deemed period. You won’t own the asset and you won’t be able to claim capital allowances. This means entering into such an agreement just before the year-end is unlikely to do much to reduce your upcoming tax bill. Saying that, tax relief is available on the lease payments over the duration of the lease and spreading the payments can be good for cash flow. If leasing a van or car watch out for hidden charges on return if you’ve gone over the mileage restrictions or returned it with a bit more than usual wear and tear.
SO WHAT’S BEST?
Like so many things in business, it depends on many factors. If uncertain then please do contact us.