Tag: Capital Allowances

The Tax Issues of Hire Purchase (HP), PCP and Leases for assets – Capital Allowances

Hire Purchase, PCP & Leasing – Capital Allowances & Tax 2026

How financing an asset affects Capital Allowances, AIA, tax relief and VAT – updated for 2026

Originally published 3 December 2021 – substantially updated September 2026

When businesses purchase assets they normally use finance, it makes sense to conserve your cash and spread the purchase cost over the life of the asset, but how will you choice impact on whether you can claim Capital Allowances, Annual Investment Allowance? First-Year Allowances? tax relief on finance costs? VAT?

You can claim capital allowances when you buy assets that you keep to use in your business, for example:

  • equipment
  • machinery
  • business vehicles, for example cars, vans or lorries

These are known as plant and machinery.

You can deduct some or all of the value of the item from your profits before you pay tax.

So clearly buying assets without finance or with a business loan is fine as you will definitely own the asset.

HIRE PURCHASE

PCP

or:

LEASING

And from 2026 there are important new capital allowance rates and new FRS 102 lease accounting rules to consider.

Quick Answer – Cash, HP, PCP or Lease?

MethodWho normally owns the asset?Capital allowances for user?Broad tax treatment
Cash purchaseBusinessNormally yesCapital allowances
Business loan + purchaseBusinessNormally yesCapital allowances + qualifying finance costs
Hire PurchaseOwnership will or may passPotentially yesSpecial HP capital allowance rules
PCP / Contract PurchaseDepends on agreementDepends on agreementContract must be reviewed
Ordinary leaseLessorNormally noAppropriate rental deductions
Long funding leaseLessor legallyPotentially lesseeSpecial tax rules
Contract hireHire companyNormally noAppropriate rental deductions

The important point is:

The name printed on the finance agreement does not always determine the tax treatment.

Hire Purchase

The normal assumption is that an asset bought under a Hire Purchase agreement will become the property of the hirer once the relevant payments and any purchase option have been completed.

The original version of this article referred to Section 67 Capital Allowances Act 2001, which remains important.

Special capital allowance rules apply where an asset is provided under an agreement under which ownership will or may pass to the person using it.

This means a business does not necessarily have to wait until the final HP payment before obtaining capital allowances.

HMRC’s current guidance states that where an asset is bought under Hire Purchase and has been brought into use, capital allowance claims can take account of the payments that will be made under the contract, excluding the interest element.

If the asset is ultimately not acquired, the capital allowance rules can require an appropriate disposal adjustment.

Can You Claim AIA on Hire Purchase?

Potentially, yes.

Using Hire Purchase does not automatically stop a qualifying asset from benefiting from the:

ANNUAL INVESTMENT ALLOWANCE

The AIA remains available on qualifying plant and machinery, subject to the relevant conditions and limits. The current annual limit remains £1 million.

Consider this example.

Machine cost

£100,000

Deposit

£10,000

HP finance

£90,000

It would be wrong to assume the capital allowance claim must simply be limited to the £10,000 cash deposit.

Where the HP and AIA rules are satisfied, substantially more of the qualifying capital cost may potentially receive relief.

This can produce an important cash-flow advantage:

TAX RELIEF CAN ARRIVE BEFORE ALL THE HP PAYMENTS HAVE BEEN MADE

The finance interest and charges are not part of the capital allowance cost and need to be considered separately.

What’s Changed Since This Article Was First Published?

When this article was originally published in 2021, the capital allowance landscape looked rather different.

There are now three particularly important 2026 changes.

1. New 40% First-Year Allowance

From:

1 JANUARY 2026

a permanent 40% First-Year Allowance is available on qualifying new and unused main-rate plant and machinery.

2. Main Writing-Down Allowance Reduced

The main-pool writing-down allowance reduced from:

18% → 14%

from:

  • 1 April 2026 for Corporation Tax; and
  • 6 April 2026 for Income Tax.

3. New FRS 102 Lease Accounting

For accounting periods beginning on or after:

1 JANUARY 2026

revised FRS 102 Section 20 significantly changes how most leases are accounted for by lessees.

These changes make it particularly worthwhile reviewing the finance method before signing an agreement.

New for 2026 – 40% First-Year Allowance

The new permanent 40% First-Year Allowance applies to qualifying:

  • new;
  • unused;
  • main-rate plant and machinery

acquired on or after 1 January 2026.

The allowance lets the business deduct:

40% OF THE QUALIFYING COST

in the first year.

The remaining balance can subsequently qualify for writing-down allowances.

The new allowance is particularly interesting because it has fewer restrictions than some existing FYAs and was specifically designed in part to improve relief for areas such as leasing businesses and unincorporated businesses.

But there are exclusions.

In particular:

CARS DO NOT QUALIFY

and:

SECOND-HAND ASSETS DO NOT QUALIFY

for this new 40% FYA.

AIA or 40% First-Year Allowance?

If an asset qualifies for more than one form of capital allowance, the business may have a choice over which allowance to claim. HMRC confirms that where an item qualifies for more than one allowance, the taxpayer can choose which allowance to use.

For many ordinary qualifying purchases, AIA may still produce:

100% IMMEDIATE RELIEF

and therefore be more attractive than claiming 40%.

But the 40% FYA can be valuable where:

  • AIA is unavailable;
  • AIA has already been used;
  • the asset is acquired for leasing;
  • the purchaser is an unincorporated business that cannot use full expensing;
  • or another first-year relief is unavailable.

So the existence of the new 40% allowance doesn’t make AIA obsolete.

It gives businesses another planning option.

Main Writing-Down Allowance – 18% to 14%

Where expenditure does not receive AIA or a First-Year Allowance, it may instead fall into a capital allowance pool.

The main-rate WDA is now:

14%

rather than the previous 18%.

The special-rate pool remains:

6%

There is also a transitional complication.

Where an accounting period straddles the April 2026 rate change, the business may need to calculate a hybrid WDA rate.

For example, HMRC’s own example of a company with a 31 December 2026 year end produces a hybrid main-pool rate of 14.99%.

So don’t automatically apply 14% to every 2026 year end without checking the accounting period.

PCP – Contract Purchase

The original version of this article described PCP as essentially an HP agreement with a balloon payment.

That is a useful commercial shorthand, but the tax position needs to be more nuanced.

A typical PCP arrangement involves:

Deposit

↓

Monthly payments

↓

Large final or balloon payment

↓

Then the customer may:

buy the asset

or:

return it

or:

replace it

For tax purposes:

PCP DOES NOT AUTOMATICALLY TELL YOU THE ANSWER

The actual contractual terms need to be reviewed.

Relevant questions include:

  • Does ownership automatically pass?
  • Is there merely an option to purchase?
  • How significant is the final payment?
  • Who bears the residual-value risk?
  • Is purchase expected in commercial reality?
  • What happens if the balloon payment is not made?

So rather than simply telling your accountant:

“It’s PCP.”

give them the actual finance agreement.

That is particularly important where significant capital allowances are being claimed.

Contract Hire and Leases

The original article correctly noted that contract hire normally does not transfer legal ownership to the hirer.

In a straightforward lease:

THE FINANCE / LEASING COMPANY OWNS THE ASSET

and therefore the lessee will not normally claim ordinary capital allowances on the underlying asset.

Instead, the business normally obtains the appropriate tax relief arising from the lease payments, subject to the relevant tax rules.

But there are important exceptions.

These can include:

  • Hire Purchase and similar agreements;
  • long funding leases;
  • fixtures;
  • and other specific statutory regimes.

So:

“It appears on our balance sheet, therefore we claim capital allowances”

is not necessarily correct.

FRS 102 Lease Accounting Changed From 2026

This is one of the most important additions to the original article.

In March 2024, the Financial Reporting Council introduced substantial revisions to FRS 102.

Most of those changes are effective for accounting periods beginning on or after:

1 JANUARY 2026

The revised Section 20 – Leases moves FRS 102 closer to IFRS 16.

Under the previous rules, lessees generally classified leases as:

Operating leases

or:

Finance leases

Many operating leases stayed off the lessee’s balance sheet.

That position has now changed substantially.

Most FRS 102 Leases Now Go on the Balance Sheet

For most lessee arrangements under revised FRS 102, the business recognises:

A RIGHT-OF-USE ASSET

and:

A LEASE LIABILITY

The accounts no longer simply show:

Rent expense

for many leases.

Instead, the P&L will generally include:

  • depreciation on the right-of-use asset; and
  • interest on the lease liability.

The balance sheet therefore reports both:

more assets

and:

more liabilities.

The cash payments may be exactly the same.

The accounting presentation is not.

FRS 102 Example – £100,000 Piece of Equipment

Suppose Consultancy 4 Business Ltd enters into a five-year lease for a piece of equipment.

Under the old operating lease model, the accounts might broadly show:

Balance Sheet

No leased asset.

No lease liability.

Profit & Loss Account

Lease rental expense.

Under revised FRS 102, if the lease falls within the new recognition model, the accounts may instead contain:

RIGHT-OF-USE ASSET

representing the contractual right to use the equipment

and:

LEASE LIABILITY

representing the obligation to make future lease payments.

The ROU asset is depreciated.

Interest is charged on the lease liability.

So the accounts can look very different even though:

THE COMPANY HAS NOT BOUGHT THE MACHINE

Does a Right-of-Use Asset Mean You Can Claim Capital Allowances?

This is the key point.

NO – NOT AUTOMATICALLY

Accounting and tax are not the same thing.

Under FRS 102, your business might recognise an accounting asset on its balance sheet.

But that does not itself make the business the legal owner of the underlying machine.

Capital allowance entitlement therefore needs to be determined separately.

You could have:

RIGHT-OF-USE ASSET IN THE ACCOUNTS

but:

NO CAPITAL ALLOWANCES ON THE UNDERLYING ASSET

because the leasing company remains the owner.

The exceptions — such as the HP and long funding lease rules — then need to be considered.

Accounting Treatment ≠ Tax Treatment

This is worth remembering:

FRS 102 TELLS US HOW TO ACCOUNT FOR THE LEASE

while:

TAX LAW TELLS US WHO GETS THE TAX RELIEF

That distinction becomes much more visible from 2026.

A director may reasonably look at the accounts and say:

“There’s an asset on our balance sheet, therefore surely we own it?”

But a right-of-use asset is an accounting representation of the contractual right to use something.

It does not necessarily mean legal title has transferred.

What About the Tax Deduction Under Revised FRS 102?

The move to right-of-use accounting does not simply mean tax relief disappears.

However, the tax treatment may not exactly follow:

depreciation

plus:

lease interest

as shown in the accounts.

The lease tax rules need to be considered separately, particularly where:

  • the arrangement is a long funding lease;
  • there is an option to purchase;
  • the underlying asset has special tax treatment;
  • or other specific leasing rules apply.

So don’t simply copy the FRS 102 accounting entries into the Corporation Tax computation without checking the tax treatment.

Are Any Leases Exempt From the New FRS 102 Model?

Yes.

Revised FRS 102 provides recognition exemptions for certain:

SHORT-TERM LEASES

and:

LOW-VALUE LEASES

where the relevant conditions are met.

That means the new right-of-use model does not necessarily need to be applied to every small rental agreement.

But significant:

  • property leases;
  • machinery leases;
  • vehicle fleets;
  • warehouse leases;
  • office leases;
  • equipment leases

should now be reviewed carefully.

Why Does FRS 102 Matter When Choosing HP or a Lease?

Previously, businesses sometimes viewed operating leases as attractive because they could stay off the balance sheet.

For FRS 102 businesses that distinction has now substantially disappeared for most leases.

So when comparing:

BUY

HP

or:

LEASE

consider both:

THE TAX RESULT

and:

THE ACCOUNTS RESULT

The new lease accounting can affect:

  • reported assets;
  • reported liabilities;
  • EBITDA;
  • operating profit;
  • finance costs;
  • gearing;
  • bank covenants;
  • credit assessments;
  • and other financial ratios.

That could matter significantly where lenders or investors review the accounts.

£100,000 Machine – Compare the Options

Let’s bring the position together.

Cash Purchase

Machine:

£100,000

Business owns it.

Potential:

  • AIA;
  • 40% FYA;
  • full expensing where applicable;
  • or writing-down allowances.

Business Loan

Bank lends:

£100,000

Business buys machine.

Business owns asset.

Potential capital allowances on the machine.

Qualifying finance costs considered separately.

Hire Purchase

Machine:

£100,000

Deposit:

£10,000

HP finance:

£90,000

Ownership will or may pass.

Special HP capital allowance rules apply.

AIA or other allowances may potentially be available.

Finance cost considered separately.

PCP / Contract Purchase

Deposit.

Monthly payments.

Balloon.

Potential purchase option.

The tax treatment depends on:

THE CONTRACT

not simply the acronym PCP.

Ordinary Lease

Finance company owns machine.

Business has contractual right to use it.

Under revised FRS 102, the business may show:

right-of-use asset

plus:

lease liability

but:

THAT DOES NOT AUTOMATICALLY GIVE IT CAPITAL ALLOWANCES

Long Funding Lease

Special tax rules can apply.

Although legal ownership may remain with the lessor, capital allowance entitlement can potentially move to the lessee.

This is a specialist area and should be reviewed separately.

What About Cars?

Cars have their own additional tax rules covering:

  • CO₂ emissions;
  • electric vehicles;
  • new vs second-hand vehicles;
  • Benefit in Kind;
  • VAT;
  • lease rental restrictions;
  • private fuel;
  • and personal ownership versus mileage.

So the tax answer for a £100,000 machine should not simply be copied across to a £50,000 car.

If you’re considering a car, see our new guide:

Buy, HP, PCP or Lease a £50,000 Car Through Your Business?

It compares:

cash vs HP vs PCP vs lease vs personal ownership

including EV capital allowances, VAT, BIK and the 55p mileage rate.

Frequently Asked Questions

Can I claim capital allowances on Hire Purchase?

Potentially yes. Special rules apply where ownership will or may pass to the business.

Can I claim AIA on Hire Purchase?

Potentially yes where the asset and expenditure qualify.

Do I have to finish paying for the HP first?

Not necessarily. HMRC confirms that once an HP asset is brought into use, capital allowances can take account of payments to be made under the contract, excluding interest.

Can I claim capital allowances on PCP?

Possibly. The agreement needs reviewing.

Who claims capital allowances on leased equipment?

Usually the legal owner, subject to exceptions including HP-type arrangements and long funding leases.

Does putting a lease on the balance sheet under FRS 102 give me capital allowances?

No, not automatically.

The right-of-use asset is an accounting concept. Capital allowance entitlement is determined separately under tax law.

What changed in FRS 102 from 2026?

For most qualifying leases, lessees now recognise a right-of-use asset and corresponding lease liability.

Can I still get tax relief for lease payments?

Potentially yes, but the tax computation should be checked rather than assuming the depreciation and interest accounting charges automatically equal the tax deduction.

What is the new 40% First-Year Allowance?

A permanent allowance for qualifying new and unused main-rate plant and machinery acquired from 1 January 2026.

Does the 40% FYA apply to cars?

No.

What is the main WDA rate now?

The main rate is 14% from April 2026, with transitional hybrid rates where an accounting period straddles the change.

Before You Sign the Finance Agreement

Send your accountant:

  • supplier quotation;
  • asset description;
  • purchase price;
  • deposit;
  • HP / PCP / lease agreement;
  • finance charges;
  • repayment schedule;
  • balloon payment;
  • purchase option;
  • lease term;
  • expected business/private use;
  • and details of whether the asset is new or second-hand.

Because the difference between:

BUY

HP

PCP

and:

LEASE

is not simply how you pay.

It can change:

WHO OWNS THE ASSET

WHO CLAIMS CAPITAL ALLOWANCES

WHEN TAX RELIEF IS RECEIVED

HOW VAT IS TREATED

and now:

HOW THE ASSET AND FINANCE APPEAR IN YOUR ACCOUNTS

Bicknell Business Advisers’ Advice

The best time to ask:

“How should we finance this asset?”

is:

BEFORE SIGNING THE AGREEMENT

not after the first payment has been made.

A £100,000 machine could produce very different tax and accounting results depending on whether it is acquired using:

  • cash;
  • business loan;
  • Hire Purchase;
  • PCP;
  • finance arrangement;
  • or lease.

From 2026, the combination of:

40% FYA

14% MAIN WDA

and:

NEW FRS 102 LEASE ACCOUNTING

makes reviewing the finance method more important than ever.

Can Your Limited Company or Business Pay for a Garden Office?
Buy, HP, PCP or Lease a £50,000 Car Through Your Business?

About the Author

Steve Bicknell FCMA, CGMA is Managing Director of Bicknell Business Advisers Limited, specialising in property taxation, landlord tax planning, SDLT, Capital Gains Tax and property company structures throughout the UK.

Commercial Property Capital Allowances Sideways Relief

IT rental business losses can be set against general income only to the extent that they are attributable to:

  • certain capital allowances,
  • certain agricultural expenses (see PIM4224).

Until the 2010-11 tax year, relief against general income could be claimed to the extent the loss was due to furnished holiday lettings. This is not available for tax years 2011-12 onwards, see PIM4130. Losses of a furnished holiday lettings business may now only be carried forward to use against future profits of that same furnished holiday lettings business.

Where a customer claims loss relief against general income, they must take the full amount of the loss available up to the amount of their general income. They can’t opt to take a smaller amount, either they claim for the full loss or they claim for none (ITA07/S121).

PIM4220 – Property Income Manual – HMRC internal manual – GOV.UK (www.gov.uk)

The largest capital allowances are likely to be from Annual Investment Allowance claims.

Any taxpayer seeking to obtain in excess of £50,000 of otherwise unlimited income tax reliefs in any one year will find their deductions ‘capped’ (ITA 2007, s 24A). The ‘cap’ is the greater of:

  • 25% of their total income; or
  • £50,000.

steve@bicknells.net

HMO’s denied Capital Allowances

HMRC have recently confirmed their view that common areas in Houses of Multiple Occupation (HMO) are parts of a “dwelling house” and ineligible for capital allowance claims.

Claims relating to Houses in Multiple Occupancy:

We are aware that some taxpayers have submitted claims for plant and machinery allowances in respect of shared parts of houses in multiple occupation (such as hallways, stairs, landings, attics and basements within the houses). They contend that these shared areas are not part of the dwelling-house and that allowances are therefore available. We disagree with this position. If you come across such a claim, please notify the Capital Allowances single point of contact for your area.

CA11520 – Capital Allowances Manual – HMRC internal manual – GOV.UK (www.gov.uk)

The capital allowance legislation specifically denies tax relief for plant and machinery installed in a dwelling house. However, plant and machinery installed in the common areas such as hallways, stairs and lift shafts, in blocks of flats would qualify as the flats themselves are the dwellings, not the building as a whole.

Expenditure incurred on the provision of plant or machinery ‘for use in’ a dwelling-house is not qualifying expenditure for an ordinary property business, an overseas property business or the special leasing of plant or machinery.

CA23060 – Capital Allowances Manual – HMRC internal manual – GOV.UK (www.gov.uk)

This would seem inconsistent with the HMRC view on HMOs and there may be a test case on the interpretation, particularly as there is no definition of “dwelling house” in the tax legislation. There is also a lack of clarity concerning the status of University Halls of residence where there is often substantial expenditure on plant and machinery in common areas.

Furnished Holiday Lets although a holiday home is a ‘dwelling house’, providing the conditions are met to meet the Furnished Holiday Let (“FHL”) legislation, capital allowances can be claimed CA20025 – Capital Allowances Manual – HMRC internal manual – GOV.UK (www.gov.uk).  FHL are deemed as ‘trading’ for tax purposes. The restriction for claiming capital allowances on dwellings (CAA2001 35) is therefore NOT applicable to FHL’s.

steve@bicknells.net

Why are Capital Allowances important on commercial property?

The rules are in Capital Allowances Act 2001.

Sections 21 and 22 explain the Assets which can’t be claimed and Section 23 lists items that can be claimed

Expenditure unaffected by sections 21 and 22
1. Machinery (including devices for providing motive power) not within any other item in this list.
2. Electrical systems (including lighting systems) and cold water, gas and sewerage systems provided mainly—(a) to meet the particular requirements of the qualifying activity, or (b) to serve particular plant or machinery used for the purposes of the qualifying activity.
3. Space or water heating systems; powered systems of ventilation, air cooling or air purification; and any floor or ceiling comprised in such systems.
4. Manufacturing or processing equipment; storage equipment (including cold rooms); display equipment; and counters, checkouts and similar equipment.
5. Cookers, washing machines, dishwashers, refrigerators and similar equipment; washbasins, sinks, baths, showers, sanitary ware and similar equipment; and furniture and furnishings.
6. Lifts, hoists, escalators and moving walkways.
7. Sound insulation provided mainly to meet the particular requirements of the qualifying activity.
8. Computer, telecommunication and surveillance systems (including their wiring or other links).
9. Refrigeration or cooling equipment.
10. Fire alarm systems; sprinkler and other equipment for extinguishing or containing fires.
11. Burglar alarm systems.
12. Strong rooms in bank or building society premises; safes.
13. Partition walls, where moveable and intended to be moved in the course of the qualifying activity.
14. Decorative assets provided for the enjoyment of the public in hotel, restaurant or similar trades.
15. Advertising hoardings; signs, displays and similar assets.
16. Swimming pools (including diving boards, slides and structures on which such boards or slides are mounted).
17. Any glasshouse constructed so that the required environment (namely, air, heat, light, irrigation and temperature) for the growing of plants is provided automatically by means of devices forming an integral part of its structure.
18. Cold stores.
19. Caravans provided mainly for holiday lettings.
20. Buildings provided for testing aircraft engines run within the buildings.
21. Moveable buildings intended to be moved in the course of the qualifying activity.
22. The alteration of land for the purpose only of installing plant or machinery.
23. The provision of dry docks.
24. The provision of any jetty or similar structure provided mainly to carry plant or machinery.
25. The provision of pipelines or underground ducts or tunnels with a primary purpose of carrying utility conduits.
26. The provision of towers to support floodlights.
27.The provision of—(a) any reservoir incorporated into a water treatment works, or (b) any service reservoir of treated water for supply within any housing estate or other particular locality.
28.The provision of—(a) silos provided for temporary storage, or(b) storage tanks.
29. The provision of slurry pits or silage clamps.
30. The provision of fish tanks or fish ponds.
31. The provision of rails, sleepers and ballast for a railway or tramway.
32. The provision of structures and other assets for providing the setting for any ride at an amusement park or exhibition.
33. The provision of fixed zoo cages.

 

Sections 21 and 22 do not apply to any expenditure to which any of the provisions listed in subsection (2) applies.

(2)The provisions are—

section 28 (thermal insulation of industrial buildings);

section 29 (fire safety);

section 30 (safety at designated sports grounds);

section 31 (safety at regulated stands at sports grounds);

section 32 (safety at other sports grounds);

section 33 (personal security);

section 71 (software and rights to software);

http://www.legislation.gov.uk/ukpga/2001/2/part/2/chapter/3

As CATAX say in their video 9 out of 10 commercial building owners are not claiming these capital allowances!

The key reason why they aren’t claiming is because when you buy or develop a building the costs don’t tend to be broken down to show these items so you need to have them retrospectively assessed by a surveyor.

If you are buying a commercial property the CPSE will ask the seller about Capital Allowances. Sellers will need to pool their fixtures expenditure (even where they have not, nor do not wish to claim allowances themselves) unless they are prepared to risk the price of their property being chipped down in recognition that no allowances will be available.

https://www.taxation.co.uk/Articles/2014/04/08/323051/good-bad-and-ugly

Often at the time of Sale a Section 198 will agree the Capital Allowances

CAA01/S200 – S201An election under CAA01/S198 or S199 must be made by notice in writing to HMRC.

It should contain the following information:

* the amount fixed by the election, 
* the name of each person making the election, 
* information sufficient to identify the fixture and the relevant land, 
* particulars of the interest acquired by or the lease granted to the purchaser; and 
* the tax district references of each of the persons making the election. 
  
The election is irrevocable. 


The time limit for making the election is two years after the time when the interest is acquired by the buyer or the buyer is granted the lease. 

A copy of the election must be included with each party's return for the first period affected by it. This will normally be the period in which the disposal or acquisition takes place. 

The amount apportioned to the fixture must be quantified when the election is made. 
https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca26850

steve@bicknells.net

The Tax Advantages of Commercial Fit Out

Interior construction site

When you carryout out a refurbishment or Fit Out of your business premises you will be entitled to Capital Allowances.

Here is quick summary of the main types of allowance.

Business Premises Renovation Allowances

BPRA gives incentives to bring back into business use derelict or business properties that have been unused for at least one year. It gives an allowance of 100% for certain expenditure you incur when converting or renovating unused business premises in a disadvantaged area.

BPRA started on 11 April 2007 and ends on:

• 31 March 2017 for Corporation Tax
• 5 April 2017 for Income Tax

To qualify for BPRA, you must incur qualifying expenditure.

Qualifying expenditure is capital expenditure you incurred when you:

• convert a qualifying building into qualifying business premises
• renovate a qualifying building that is, or will be, a qualifying business premises
• repair qualifying business premises

Capital Allowances

Integral features

Integral features are:

• lifts, escalators and moving walkways
• space and water heating systems
• air-conditioning and air cooling systems
• hot and cold water systems (but not toilet and kitchen facilities)
• electrical systems, including lighting systems
• external solar shading

Fixtures

You can claim for fixtures, eg:

• fitted kitchens
• bathroom suites
• fire alarm and CCTV systems

You can claim if you rent or own the building, but only the person who bought the item can claim.

Annual Investment Allowance

The Allowance is set at up to £200,000 from January 2016

You can only claim AIA in the period you bought the item.

The date you bought it is:

• when you signed the contract, if payment is due within less than 4 months
• when payment’s due, if it’s due more than 4 months later

If you buy something under a hire purchase contract you can claim for the payments you haven’t made yet when you start using the item. You can’t claim on the interest payments.

If you don’t want to claim the full cost, eg you have low profits, you can claim part of the cost as AIA and part using writing down allowances. You can do this at any time as long as you still own the item.

If your business closes, you can’t claim AIA for items bought in the final accounting period.

Enhanced Capital Allowance

100% capital allowances can be obtained for expenditure on environmentally beneficial technology. This enables businesses to write off the whole capital cost against their profits in the year in which the expenditure is incurred and therefore to obtain valuable tax relief which can improve cashflow.

What doesn’t count as plant and machinery

You can’t claim capital allowances on:

• things you lease – you must own them
• buildings, including doors, gates, shutters, mains water and gas systems
• land and structures, eg bridges, roads, docks
• items used only for business entertainment, eg a yacht or karaoke machine

New Tenant – Lease Incentives

New Tenants may get incentives such as rent free periods or reverse premiums. The new accounting rules (FRS102) mean that these incentives are spread over the life of the lease not taken over the period to the first rent review. Spreading these savings out will mean that tenants get a tax advantage as the gain will be less at the beginning of their lease.

Fit Out Finance

Generally funding fit outs is an issue due to the nature of the security.

However there are lender who can provide funding, for example http://www.fitoutfinance.uk/

As the name suggests, Fit-Out Finance is dedicated to funding fit-outs of business premises, including:

• Head Office.
• Warehousing.
• Fast food outlets.
• Restaurants/retail premises.
• Showrooms.

Using a blend of hire purchase, lease, unsecured loan and other facilities where appropriate, we are able to fund not just the tangibles, but all manner of tertiary work, from survey through to painting and plumbing.

As previously noted HP and Loans are suitable for tax relief through Capital Allowances.

Here are a couple of examples of how funding can work.

Start Up Fast Food Outlet

Well researched & professional, our client was buying into a well-respected fast food franchise.

Their bank had supported the franchise purchase, but there was a further £75,000 required to fit the premises to franchisor specification.
With the customer’s background and a solid franchise, arranging leasing on equipment was fairly straight forward.

That left a £30,000 shortfall on less tangible works – as there were 2 owners in the business, we were able to secure Start-Up loans to fund the shortfall

A Warehouse

The client was a well established, profitable hirer of electrical equipment. Despite being profitable, the business was highly seasonal and therefore cashflow fluctuated wildly.
Most of their funding was done under their roof, being shared between the bank, and the bank’s own finance company, who handled their hire stock.
However, when they approached the finance company, they were confidently informed that racking and mezzanine floors couldn’t be financed; hence they ploughed on, pouring valuable cash into fixed assets.

They had spent over £100,000 on racking etc and were struggling with cashflow to complete the project.

The Funder was able to:
• Release the full value of the assets they had paid for.
• Provide ongoing further funding for a mixed bundle of assets, ranging from a mezzanine floor to bikes used to move around the facility efficiently.
• Provide a £35K term loan to cover intangible costs.

steve@bicknells.net

Contact Us

Would you give your staff a company motorbike?

Extreme couple sitting by motorcycle. Adventure and travel

Motorbikes have a clear tax advantage over company cars because they are classified as plant and machinery. This is better for both employers and employees.

Capital Allowances are restricted on cars based on CO2 emissions and employees also get taxed on the benefit in kind based on CO2.

Motorbikes being plant and machinery aren’t restricted and you could use the Annual Investment Allowance to offset the cost.

The Benefit In Kind is assessed  as 20% of the cost of the motorbike but there will also be a benefit in kind on fuel, repairs and insurance.

The company will also have to pay 13.8% Class 1A NI on the benefit in kind but that applies to most benefits including cars and motorbikes.

Would motorbikes be a viable option for your employees?

steve@bicknells.net

Would a Partial Capital Allowance Claim reduce your tax bill?

Businessman get idea

It is not necessary to claim the maximum capital allowances available or even claim them at all, crazy as it might sound there are situations when not claiming capital allowances can reduce your tax bill!

Sole Trader Example

The personal tax allowance is currently £10,600 (2015/16)

Lets assume profits are £15,000 and Capital Allowances available are £5,000, so that would reduce taxable profits to £10,000 which would waste £600 of the personal tax allowance.

It would therefore be better to only claim £4,400 in capital allowances and claim the remaining £600 in the following year.

Company Example

Companies within a Group can only offset losses in corresponding tax periods, so if the the capital allowances increase the loss in one part of the group beyond the profits of the rest of the group then there would be no benefit to claiming them in that period.

Companies can claim capital allowances in any of the following 3 tax years.

There is an excellent example of this in the following blog http://taxnotes.co.uk/a-basic-introduction-to-capital-allowances/

steve@bicknells.net

How De-pooling Short Life Assets can reduce your tax

In the Finance Bill 2011 the period over which expenditure on plant or machinery can be given “short life assets” (SLA) treatment was extend from 4 year to 8 years.

The change will have effect for expenditure incurred

• on or after 1 April 2011 for businesses within the charge to corporation tax (CT); and

• on or after 6 April 2011 for businesses within the charge to income tax.

If a business elects for plant or machinery to be treated as a short life asset, capital allowances are calculated individually on the asset until a “cut-off” point. This ensures that, if the asset is sold or scrapped before the cut-off point, the total allowances given over the period of ownership equal the actual net cost of the asset to the business.

An election will be beneficial if the asset depreciates faster than the rate at which capital allowances are given, and it is sold before the cut-off date.

Expenditure incurred on an asset given SLA treatment is allocated to a ‘single asset pool’ for the cut-off period. The current four-year cut-off period is four years from the end of the chargeable period in which the expenditure is incurred.

Writing-down allowances are given on the reducing-balance each year, currently at 18 per cent. If the item is scrapped or sold within a ‘four-year cut-off’ period, the remaining balance of expenditure in the pool is compared with the disposal proceeds. A further allowance, or charge, is made for the difference. This ensures that allowances given to this point match the actual net cost of the SLA.

If the Asset was placed in the Main Pool the tax relief would come through in future years through the WDA. So using the SLA will speed up Tax Allowances.

If the asset is not disposed of within the ‘four-year cut-off’ period, the remaining expenditure in the single asset pool is transferred to the main capital allowances pool, where writing-down allowances will continue to be available in the normal way.

The exceptions to SLA treatment are listed in section 84 CAA 2001 and include most cars and all expenditure on ‘long-life assets’ (assets with a useful economic life of at least 25-years) and ‘integral features’ of a building or structure.

A SLA election must be made for corporation tax within two years of the end of the relevant chargeable period in which the expenditure is incurred. For income tax the time limit is normally the anniversary of the 31 January following the tax year in which the end of the relevant chargeable period occurs.

Assets that cannot be treated as SLAs are:

  • assets that were provided for some other purpose including leasing under a long funding lease before being brought into use for a qualifying activity CA23030;
  • assets received as a gift CA23040;
  • assets used for special leasing CA20040;
  • cars apart from cars hired out to people in receipt of certain disability allowances CA23510;
  • long life assets CA23700;
  • special rate expenditure assets CA20150;
  • assets provided for leasing except:
    • those used in the designated period for a qualifying purpose and for no other purpose; and
    • cars provided for disabled people in receipt of certain allowances;
  • assets leased overseas that qualify for WDAs at the 10% rate CA24200;
  • assets leased to two or more persons jointly where at least one lessee is a non- resident who does not use the asset exclusively for earning profits chargeable to tax and the leasing is not protected leasing CA24400;
  • ships CA25000;
  • assets used partly for a qualifying activity and partly for other purposes CA27000;
  • assets that receive a partial depreciation subsidy CA27100.

http://www.hmrc.gov.uk/manuals/camanual/CA23620.htm

steve@bicknells.net

Directors Loan v’s Private Use of Company Assets

Many Directors borrow money from their Limited Company, but there are 2 key costs:

If, your company, purchased assets and you used those assets privately, the treatment is much more favourable:

  • The cost of the asset is allowed against Corporation Tax and you can claim Capital Allowances and the Annual Investment Allowance

From April 2012 the rates of capital allowances have been reduced from (a) 20% to 18% and from on the Main Rate Pool (b) 10% to 8% for  ‘special rate’ expenditure respectively. At the same time the maximum amount of the Annual Investment Allowances (AIA) will be reduced to £25,000 a year (currently £100,000).

  • The Benefit In Kind is generally 20% of the market value http://www.hmrc.gov.uk/paye/exb/a-z/a/assets-available.htm#2
  • So, based on buying an asset for £10,000 – there will be saving in Corporation Tax of £2,000 and the Benefit In Kind Tax of £1,076, thats a net saving in year 1 of £924 compared to a cost in year 1 of £2715.20 on a loan (total difference £3,639.20), although the benefit in kind will be £860.80 more expensive in future years.

The Assets could be purchased from the Director but they must be transfered at Market Value.

According to Indicator ‘Tax Breaks for Directors’ assets owned by companies include antiques, paintings, furniture, business suits (but not vehicles) and the 20% benefit in kind amounts can be deducted from the value of the asset should it subsequently sold to an employee or director.

Generally you can only reclaim VAT on the purchase of Assets for Business Use http://www.hmrc.gov.uk/vat/managing/reclaiming/private-use.htm

steve@bicknells.net