For customers with a tax year ending on 31st March, the time to review capital equipment expenditure for the current financial year is now. This will include most sole traders and individuals trading within a partnership. There is, however, a need to act fast. There are two generous capital allowance schemes available under a hire purchase agreement. In order to qualify, any equipment concerned must be on site and available for use within the financial year in which the allowance is claimed.
For those businesses in the final quarter of their financial year, the two allowances referred to above enable the full capital allowance of a newly acquired asset to be offset against tax in this financial year. The added benefit is that, under a hire purchase agreement, payment for the equipment concerned can be spread over a number of future years. The two schemes are:
Annual Investment Allowance
A capital allowance equating to 100% of the cost price of a qualifying asset can be claimed against tax in the year of acquisition. This allowance has a cap of £1,000,000 for the calendar year 2022. It is available on new and used equipment and can be claimed against both income and corporation tax. This means that all business trading styles can benefit from the scheme.
A capital allowance equating to 130% of the cost price of a qualifying asset can be claimed against tax in the year of acquisition. You read it correctly! This scheme allows a business to claim a tax allowance on a sum that is 30% more than the actual cost of the asset. By any standard, this is one of the most generous tax allowances ever introduced.
Whilst there is no cap on the amount of expenditure allowed under this scheme during 2022, the allowance can only be claimed against corporation tax. This means it is not available to sole-traders and partnerships. Unlike the annual investment allowance, super-deduction is available for new equipment only. It is also worth pointing out that it cannot be claimed in cases where assets are purchased for onward hire.
Cars cannot be included for either allowance, but commercial vehicles, plant and machinery all qualify, subject to the conditions described above.
Many businesses have a financial year ending March 2022, and this can act as a powerful and immediate incentive to bring forward capital expenditure to reduce any current tax liability. To benefit from these allowances before the end of their financial year, a business needs to ensure that any qualifying equipment, acquired by way of a hire purchase agreement, is ordered and delivered during the current quarter.
A hire purchase agreement allows businesses to acquire the equipment they need now and get the full benefits of the generous capital allowances currently available, without the need for a large cash outlay. In other words, businesses can get the tax allowances in their current financial year but spread the cost of purchase over a number of future years. A further point to note is that the interest element on a hire purchase agreement can also be offset against tax as a business expense. This means that for companies expecting to see an increase in corporation tax from 19% to 25% from April 2023, the real cost of any hire purchase agreement signed this year will reduce from that date.
In conclusion, and providing stock is available, there are many businesses that have a strong financial incentive to bring forward the acquisition of capital equipment. This means they will be able to retain cash for investment elsewhere. Capital allowances claimed now, on equipment subject to hire purchase agreements, provide the perfect solution.
BNP Paribas Leasing Solutions is not authorised to provide tax advice. You should consult an accountant in order to understand the tax consequences of any investment decision.