Capital allowances, the basics broken down
When equipment is purchased for use in a business, tax relief is given in the form of capital allowances (CAs). Sometimes CAs are spread over a few years; sometimes they are given in full for the financial period in which the equipment was purchased.
The equipment can either be purchased by a director or the company itself and, depending on who does buy it, this can affect tax efficiency. If a director purchases the equipment, but it is only used by other employees for doing their job, they will be unable to claim CAs for the cost. The company should therefore do the buying.
When a piece of equipment is used by a director, CAs can be obtained by:
- The company buying and owning it, then letting the director use it
- OR: the director buying and owning it, using money supplied by the company.
Notable exclusions for CAs include cars and vans.
What about tax efficiency?
If the company funds the purchase, the tax advantage varies depending on how it provided the monies to the director. It could pay a dividend (if the director is also a shareholder), give the director extra salary to make the purchase, or make the equipment a gift (making it a taxable benefit in kind). Each of these will have different levels of tax efficiency – work with your accountant to get the exact numbers before going ahead. But, broadly, it will be more efficient for the company to purchase and own the equipment, then claim the CAs. If the company does not have the funds, a director could lend it the money to make the purchase.
If the rules for CAs sound complex, this is a common point of view, but it can be that optimising tax efficiency when equipment is purchased is as simple as “who will buy it?”. If you are considering investing in equipment for your business and want to know about tax relief, give the Figurit team a call.
For help with business or personal tax planning, call Figurit (formerly known as Lansdell & Rose) on 020 7376 933 or complete the form below.