1 Dec 2013
David Foster
Job Title
• Purchasing equipment is clearly not an inexpensive proposition and there is rarely a good time to make the move. However, practices that take good advice can take advantage of timing and the current tax regime.
LET’S BE FRANK – for many practices, life as a business owner has rarely been more challenging. The uncertainty created by the prolonged recession has made any decision to invest in new equipment easy to postpone until “better times return”.
Understandable though this may be, failure to replace outdated equipment or invest in new technology with revenue-generating potential could actually be the worst reaction to these troubled times. With some signs the economy may be starting a slow recovery, now may be the ideal time to question whether you have the correct equipment in place to allow you to provide the quality of service you and your clients would wish to see.
The good news is not only can you improve your service levels by carefully considering how and when to acquire new equipment, you can greatly benefit your practice cash flow and save on your next tax demand as well. There are two main areas where the correct funding package can provide significant benefits to practice cash flow – VAT and tax.
If you purchase an item of equipment just after your VAT quarterly return, you will have to pay the VAT due on the invoice and reclaim in three months’ time when your next return is submitted. No big deal, some may say, but if your equipment costs £20,000, the VAT on this will be £4,000 and you will have to cover that cost for three to four months – the greater the spend, the greater the potential impact on cash flow.
By ensuring you time your purchase to coincide with your VAT return, time for the practice to cover this outlay can be reduced to a maximum of one month and, at certain times of the year when the overdraft may be under strain, this can be very important in avoiding bank charges or indeed breaching your overdraft limit, which should be avoided at all costs.
The aforementioned applies to cash transactions, as well as hire purchase (HP), via a finance company.
Does this mean all transactions should be delayed to obtain this benefit? You may have no alternative if you use cash, but HP can offer some alternatives.
• You can, of course, pay the VAT as a deposit at the start of your HP agreement and reclaim it in your next return in the same way as a cash transaction.
• You can (assuming the finance company is agreeable) finance the VAT as well, reclaiming the VAT via your next return and providing a possibly much-needed boost to practice finances. Not all finance companies will do this, so it may be best to stick to those specialising in the veterinary market.
• Finally, it is possible to have a payment profile where you pay the VAT to the finance company, but not until the third or fourth direct debit, when you will also be receiving the VAT back in your normal return. Again, not all finance companies will offer this, so ensure you ask to receive this potential benefit.
As many business owners may be aware, as of January 1, 2013 for a two-year period, your annual investment allowance (AIA) was increased from £25,000 to £250,000 – allowing any qualifying asset purchased in this period to potentially be claimed in full against taxable profits.
This measure was introduced to incentivise businesses to invest in capital equipment and help stimulate the economy. It is time limited and especially for major investments, which will provide a significant benefit to practice cash flow.
The cost of any purchase of qualifying assets may be offset against taxable profit in the year of purchase (most equipment will qualify, but land, buildings and noncommercial vehicles do not).
This means that following a capital purchase, your next tax demand will be substantially reduced, while improving your working environment and practice for the benefit of all clients.
As an example, acquiring equipment costing £50,000 could attract tax relief of £20,000 for a 40 per cent taxpayer. However, whatever your rate of tax, the cash flow benefits are significant, with a substantial reduction in tax payable gained much closer to the point of purchase.
As you may expect, there are a few complications with any Government scheme, and finance companies can discuss your individual circumstances with your accountant to ensure you maximise the benefits and obtain the funding package to suit those circumstances.
There are transitional rules for tax years that straddle the two-year period until January 2015. Newly started practices may not have sufficient taxable profits to offset in their first trading year, and so the advice would be to work with a specialist finance company that understands your market and can recommend the most suitable type of finance for you.
The term of the agreement does not affect the AIA, so whether your HP agreement is one year or five years, the available tax relief is applied to your next tax return. As you might expect, interest payable is reclaimed over the course of the agreement.
Not all bad news then, and although purchases should not be made solely on the basis of tax relief, there is a compelling case to be made that serious consideration should be given to investing in your practice now.
By using the correct funding package, the benefits are difficult to ignore. Bearing in mind your AIA limit expires in December 2014, these benefits will soon disappear.
