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A guide to effective investments in equipment for manufacturers

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  • For manufacturing businesses investing in significant pieces of plant and machinery can be key to driving business growth. This spending can vary from a few thousand pounds to hundreds of thousands of pounds every year.
  • If you’ve identified the new piece of equipment your business needs, it’s worth pausing to consider the best way to structure the purchase and tax can play an important role in the determining the best option for your business.
  • The tax treatment of capital expenditure can vary wildly depending on the timing and type of purchase. Read this step-by-step guide of what to consider, and find the best tax and cash flow solution for your business and your new machine

 

Buying a new piece of plant and machinery can often be a key business decision, changing the shape of your balance sheet and impacting on productivity and efficiency, which ultimately drives profitability. If you are considering the purchase of a significant new piece of plant, tax planning can play an important part in reducing the long term cost of the investment helping to boost both cash flow and profitability.

 

There are a number of ways to fund the acquisition of plant and machinery and some of the key mechanisms are set out below:

 

 

Approach

Cash flow timing

Owned?

Interest

Tax

Considerations

Purchase out of cash

Up front cost

Yes

No

Relief based on capital allowances

Capital allowances are restricted where business spends more than £200k in total on fixed assets

 

HP or asset backed lending

Cash impact is spread over period of agreement

Effectively yes (once final payment made)

Yes - tax deductible

Relief based on capital allowances

Capital allowances are restricted where business spends more than £200k in total on fixed assets

 

Finance lease

Cash impact is spread over period of agreement

No but entitlement similar to ownership

Yes - tax deductible

Relief based on accounting depreciation which mirrors term of lease

 

Can result in better cash flow impact. Consider long funding lease rules

 

Lease rental

Cash impact is spread over period of agreement

No remains owned by lease company

No interest but lease rental payments have factored in cost of capital

Annual relief for lease rentals

 

 

 

On the face of it, the decision may seem simple particularly where a business has surplus cash. However, making the right decision requires strategic thinking with an eye on future plans and cash flow implications especially as indications from the Bank of England are that the cost of borrowing will increase over the next few years.

 

Should surplus cash be used?

 

Using cash to purchase a new piece of plant or machinery can seem a sensible approach if a business has surplus cash and a positive cash flow cycle. However, securing finance over plant and machinery at the outset is more straightforward and less expensive than seeking bank borrowing at a subsequent date. Before committing cash it can be beneficial to consider medium term funding requirements or whether this could be used strategically to drive profitability in another way for the business e.g. through a strategic acquisition or Research and Development (R&D) activity (don't forget to claim the valuable tax relief on this) as it may be preferable to retain the cash to use in this manner.

 

Can we accelerate the tax relief?

 

Tax planning can be a crucial part of the decision process as it impacts significantly on the cash flow so businesses should look to accelerate the tax relief or match it to the cash flows where possible.

 

Where a business buys or hire purchases it can get tax relief of up to £200,000 of its total equipment expenditure under the Annual Investment Allowance (AIA) with the balance being written down at 18% annually. In our experience £200,000 of relief is often not enough for manufacturing businesses due to the cost of machines and peripherals combined with wider business requirements. Furthermore, it can be more tax efficient to use your AIA, against spending on areas such as integral features (e.g. air conditioning), which would otherwise receive tax relief very slowly.

 

Can we improve the tax position with planning?

 

Where the spending is likely to exceed the AIA businesses should consider whether there are any techniques to accelerate the relief (e.g. use of equipment in R D) or whether finance lease or lease rental would be preferable as they tend to match the tax relief to the cash flows and the example below shows the potential tax benefit of finance leases where a company has substantial asset spending.


This illustrates that 100% of the tax relief is secured over a four year period under a finance lease compared to 68% in the case of an acquisition so a finance lease would be more tax effective.

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