8 Feb 2017
Taking the decision to make a large capital investment will be one of the biggest business decisions a veterinary practice will make, writes Adam Bernstein.
Adam Bernstein
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Image: © selensergen/Fotolia.
Whether an x-ray machine, ultrasound, medical laser or CT scanner, equipment is not cheap to acquire and the wrong route to acquisition can seriously dent cash flow.
Several options are available – buy outright or use a third party to provide monies in the form of hire purchase, leasing or refinancing. It is the funding route David Foster, managing director of Braemar Finance, recommends to practices.
From David’s point of view, practices need a flexible funding solution that permits access to the necessary equipment, without compromising cash flow. He also points out finance can be used for both new and second-hand assets, as well as a method of releasing value from already owned equipment.
He said: “Taking out finance is actually one of the most responsible things a business can do because it means it can fund improvements to secure the future of the business in a sustainable way over an agreed term, without having to empty the cash reserves.”
While that perspective makes sense, if a practice does have a surfeit of cash earning a paltry return then, of course, an outright purchase makes sense. But, for everyone else, third party finance is the route to take.
So, what are the benefits and drawbacks of each approach?
In paying with cash, David recognises buying equipment outright may seem like a good option because practices benefit from fully owning the asset, can claim capital allowances, have not tied the business into a finance agreement and may pay less in the long run.
“However, you need to also consider the potential impact on your cash flow,” he said.
“Will you now need to use an overdraft? Business cash flow cannot be predicted – what if you need cash for an emergency? Then there is maintenance and depreciation of the equipment, and what if the equipment is not right for you?”
Next up is acquisition via a hire purchase agreement. David outlines the key benefits – hire purchase allows outright ownership of the asset and enables practices to spread the cost over a term that suits the business.
He said: “It’s worth noting, under a hire purchase agreement, expenditure up to £200,000 may be allowable against taxable profit within your annual investment allowance (see panel) in the year of purchase, the interest charges can be offset against profits for taxation, you’ve preserved your capital and can plan cash flow.”
Other positives to note are, to an extent, practices can have their cake and eat it as outright ownership is possible on completion of the agreement and they are effectively hedging against future price increases as the final cost for ownership is known at the start of the agreement.
There are others who just want to pay for using practice equipment without the need, obligation or responsibility of owning it. Leasing can facilitate easier cash flow budgeting because payments are fixed and no upfront deposit is required, and it is tax efficient as repayments may be offset against taxable profit.
David said: “It’s also worth pointing out leasing can give a practice quick access to equipment needed and can be very flexible in that the lease or rental period can be set up to suit the practice.”
Lastly, let’s not forget VAT in a lease can be reclaimed on monthly payments.
What if the practice already has the equipment, but wants to raise funds to redeploy elsewhere in the practice?
David said: “This is where refinancing comes in. It’s a very useful process that allows you to release equity from equipment or assets you already own.”
He has seen, from experience, this process become a very popular and quick way to access the value of assets on a business’ existing balance sheet.
Why do practice owners like this option so much? David thinks it is because it is efficient as there is no interruption – the asset does not move and is not replaced. Refinancing gives practices choice in they are given a cash injection to use the money to buy other assets that may not be accessible through hire purchase or leasing agreements.
Best of all, as David noted, “it can spread the cost of the refinanced equipment further – finance companies can take over the finance agreement a practice has with another provider to extend the term and effectively lower the monthly cost”.
But there is more to the buying decision than tax and cash flow. Practices also need to consider how the new equipment is to fit in with growth plans. Is the equipment entirely new to the practice or is it needed to cope with extra demand? In other words, has it considered if the cost can be covered if demand dips?
Alternatively, if it is expected demand will rise, could the practice be left buying another piece of equipment to cope? Maybe buying a larger unit at a higher cost in the first place might have been more economic in the long run.
It is also important to quantify likely running costs. What may prove inexpensive at first could prove costlier in the long run – it is the way printer manufacturers reel in customers by offering cheap printers and selling very expensive consumables. Aspects to consider include fuel costs, maintenance and repair costs against any increased output from the new equipment.
Lastly, the deciding factor could be how long the equipment will last or be kept for. Some businesses regularly replace equipment every three or four years and do not want to own it. Others will only replace when the equipment is broken or too expensive to maintain. The calculation could, quite simply, boil down to personal perspective and that once equipment is paid off its use becomes nominally “free” barring maintenance costs.
A review of the options is not complete without an examination of AIA, a very helpful tax planning tool.
In essence, AIA is a capital allowance for UK businesses that enables them to write off 100 per cent of the cost of newly acquired assets, such as plant, machinery, equipment and commercial vehicles, in the first year of ownership. Effectively, the full tax relief for the equipment is received in the first year while being purchased over several years, thereby assisting cash flow.
AIA has a generous upper limit that means up to £200,000 of capital expenditure per financial year can be offset against tax, although nowhere near as valuable as the previous cap of £500,000 removed on 31 December 2015.
But not everything and every method of acquisition is allowable under AIA. To qualify for it the agreement will have to intend ownership being passed on. It is important practices do not to get confused here, especially given the generic use of the word “lease” in different types of agreement.
AIA can be used almost universally by sole traders, partnerships and limited companies. However, mixed partnerships – both people and corporate partners – cannot take advantage of AIA. In other words, the type of business being run is irrelevant providing it trades as one of the above entities and purchases an eligible asset during the qualifying period. VAT-registered practices recover VAT on the asset in the usual way, then claim AIA on the net cost of the equipment.
What are qualifying assets? A list is available on the Government’s website
(www.gov.uk/capital-allowances/overview) of what is allowable, but, for our purposes, it includes dental, medical, scientific, veterinary equipment, office furniture, office equipment, IT and computers, AV equipment, commercial vehicles, HGVs, trucks, trailers, vans, generators and farm machinery. Practices will not, in other words, have any issues claiming for an ultrasound or x-ray equipment. However, they cannot claim AIA on a car, as they are specifically excluded.
Practices, like other businesses, do not always buy brand new equipment. So, does second-hand equipment qualify for AIA? Yes, providing it is new to the business and has been purchased.
Remember: leasing will not qualify for AIA if there is no intent to own the item. It makes sense to take good accounting advice before acquiring equipment via a finance agreement – especially if it is expensive.
