Read on if you and your manufacturing company falls into one of the following categories:
– For manufacturing companies 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.
– You have 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 depending on the timing and type of purchase.
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.
Equipment purchasing – what do you need to know?
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.
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 | Can the asset qualify for the new full expensing relief enabling immediate corporation tax relief for all of the cost. |
| 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 | Review whether qualifies for full expensing relief to accelerate tax relief |
| 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 | Not as beneficial as full expensing relief 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 |
The introduction of the new full expensing relief, for qualifying plant and machinery spend until March 2026, means that there are corporation tax advantages to acquiring a new plant for operational use rather than leasing it. The company could recover up to 25% of the cost as a reduction in the corporation tax bill for the year of spend.
On the face of it, the decision may seem simple particularly where a business has surplus cash that can be invested prior to March 2026, but making the right decision requires strategic thinking with an eye on future plans and longer term operational strategy and the overall cash flow implications.
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 can be 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 company buys or hire purchases a new qualifying asset, which will not be used for leasing, prior to 31 March 2026 it can get tax relief for up to 100% of the expenditure against the taxable profits for the year of expenditure so there could be some benefits to accelerating investment programmes.
Where the asset is an integral feature (e.g. air-conditioning or electrical systems) then relief will only be available at a rate of 50% of the expenditure but the company will also be able to offset its annual investment allowance of £1m to accelerate corporation tax relief.
Buying a new piece of plant or machinery is a big decision for any business. Once you’ve decided to go ahead with a new purchase it’s worth considering the financing and tax implications as part of your planning. In many circumstances tax relief can be accessed in a way that is positive for cash flow, helping to offset the increased working capital demands that arise from the new purchase and we work with clients to help manage the cash flow impact of substantial acquisitions.
For further information on any of the points raised, please contact Andrew England or contact us via the contact form below: