Acquire assets and borrow money tax efficiently
Tax efficient methods of borrowing and how they can apply to your business.
Most businesses will need to borrow money at some point, whether when starting up, funding growth or purchasing equipment.
It is possible to cut the cost of borrowing by doing it in a way that reduces your overall tax bill. Tax relief on borrowings is not sufficiently exploited by some businesses.
Tax relief may offset the costs of some types of borrowing - though not all. Careful consideration must be given to the implications of all borrowing.
This guide illustrates some tax-efficient methods of borrowing for example, tax relief for buying or leasing assets or perhaps you may decide to borrow from the directors' pension scheme.
Tax relief for buying or leasing assets
Information on the tax reliefs available when buying or leasing assets, and the rules for VAT.
The tax relief available when acquiring business assets depends on whether you buy them outright, or on the type and length of the lease. This also affects whether VAT will be charged upfront or periodically.
The cost of renting or leasing an asset is deductible as a business expense so this can reduce your overall tax bill.
If you expect to own the asset at the end of the lease or hire purchase period, this is a supply of goods for VAT purposes. So you will have to pay VAT on the whole value at the start of the contract. If you are VAT-registered and want to reclaim VAT and sell the asset, you may have to account for VAT on your selling price. You may also have to account for VAT on the value of the asset if you give it away for free.
If you will not become the owner of the asset at the end of the lease or hire purchase contract, this is a supply of services for VAT purposes. So VAT will be payable periodically.
Note that if the leased asset is a vehicle, the right to recover VAT is restricted in some circumstances. HM Revenue & Customs (HMRC) provides guidance on .
See calculating tax relief when acquiring an asset.
Capital allowances
When you buy plant, machinery and IT equipment, you can deduct a proportion of the cost from your taxable profits each year - known as capital allowances.
You can claim capital allowances if the equipment is:
- bought outright
- bought through hire purchase
- supplied under a long funding lease - HMRC provides .
You can't claim capital allowances with shorter leases but the leasing company can, so you should benefit indirectly through lower rental charges. Also, because it's a trading expense, you can usually deduct the full rental costs from your taxable income.
For more information, see calculating tax relief when acquiring an asset and decide whether to lease or buy assets.
Calculating tax relief when acquiring an asset
How tax relief can work in different ways when borrowing or leasing to acquire an asset.
The tax relief available when acquiring business assets depends on whether you buy them outright, or on the type and length of the lease. For more information, see tax relief for buying or leasing assets.
When you buy plant, machinery and IT equipment, you can deduct a proportion of the cost of buying it from your taxable profits each year - known as capital allowances.
Capital allowances are usually a fixed proportion of the cost of the equipment. Still, many small and medium-sized businesses get a higher allowance in the year they buy the asset. See capital allowances.
HM Revenue & Customs provides .
In addition, GOV.UK provides information on .
Borrow money for capital investment from pension schemes
How small self-administered pension schemes allow a business to borrow money with certain restrictions.
Employers are not generally allowed to borrow from a business' pension scheme. One exception is with small self-administered schemes (SSAS).
SSAS are occupational pension schemes designed for shareholding directors of small limited companies. The schemes are permitted to lend money to the company for any purpose including capital investment, ie for capital assets (tangible property that cannot easily be converted into cash and will be held long-term) or fixed assets.
However, there are restrictions on loans that can be made from the SSAS. Read Money Helper .
These loans are tax efficient for the pension scheme as the interest income earned is not subject to tax. The company itself can claim tax relief for the interest payable. Its owners are usually the SSAS members so they benefit from its tax-efficient investment - effectively they are borrowing money from and paying interest to themselves.
There are five key tests that a loan must satisfy to qualify as an authorised employer loan, which are:
- security
- interest rates
- term of loan
- maximum amount of loan
- repayment terms
The scheme would have to be registered with HM Revenue & Customs (HMRC) and a formal loan agreement should be drawn up.
Read HM Revenue & Customs .
Claim loan interest against tax
If you deduct loan interest from your profits you can reduce your business tax bill.
Interest paid on loans taken out by businesses is a deductible expense from your final profit or loss figure when your tax bill is calculated. The loan interest can only be deducted from profits if the loan is exclusively for a business purpose or a property letting if it is part of your business premises.
Interest on overdrafts and credit cards can be treated as a deductible expense for calculating the profit for tax only if the overdraft or credit cards are used for business purposes. If you are a sole trader or part of a partnership and you also use the overdraft or credit cards for personal use, then you cannot claim interest payments as a business expense.
In the case of an individual, you may also be able to claim tax relief against income tax for interest paid on a loan if the loan was a qualifying loan, as defined by HM Revenue & Customs (HMRC).
Qualifying loans include those used:
- to buy shares in or to lend money to a business in which you own more than 5% of the shares
- to buy shares in a limited company in which you work full-time
- to buy shares in or lend money for business purposes to a partnership
There are conditions attached to such qualifying loans:
- the business must be a closed company - where five or fewer directors or shareholders control the company
- the lender must own more than 5% of the shares or work as part of the management