The UK tax code has numerous reliefs and allowances that reduce tax when businesses invest in qualifying assets.
Some of the reliefs allow up to 100% of the invested cost to be written off against taxable profits and companies can presently write-off 130% of qualifying expenditure.
But aside from these tax incentives to invest, it is worth considering the bottom-line effect that the investment will have on business profitability.
Cashflow considerations
Companies, who can claim a 100% write-off for an asset purchase, will presently save £190 for every £1,000 spent – this based on corporation tax rates being 19%.
Self-employed traders will save between £200 and £450 for every £1,000 spent – based on income tax rates ranging from 20% to 45%. There may also be Class 4 NIC savings.
In both cases the cash outlay (or debt acquired to fund a purchase) exceeds any overall reduction in tax payable.
Bottom-line mentality
You may be tempted to upgrade an asset out of hubris. For example, part-exchange a company car. If the vehicle offers savings in running costs or enables you to increase sales and profits, then the investment – you could say – makes commercial sense.
If the payback in additional profits is less certain, then the investment return may be less certain even when after-tax savings are considered.
Do the math…
When making decisions on major additions or replacements of plant, vehicles or other high-value equipment, be sure to consider all the effects on your business prospects. Otherwise, your tax reductions may come at the expense of hard-won cash reserves.
We can help you crunch the numbers to see if there is an overall benefit to your business. Please call before making any significant buying decisions.