Did you know that the Finance and Leasing Association provided £40 billion to the public sector and companies in 2024? The number clearly indicates that the asset finance market is strong and is only growing with time. Companies, especially SMEs, franchises, and startups, are not purchasing equipment from their cash balance but are depending on loan funds to acquire new machinery and tools.
The primary reason to depend on an asset finance company is the tax break that you get. Your machinery qualifies for tax benefits, saving your profits and helping your business grow.
The question is, does all equipment qualify for the benefit, or are there certain limitations to consider? This blog overviews the tax relief on asset financing and how it works.
Tax Implications on Various Types of Asset Finance
Your company can apply for different types of asset finance, depending on the requirements. Below is a quick differentiation along with their tax implications:
1. Hire Purchase
You can pay monthly installments for a fixed period. Once the payment is 100% clear, the asset ownership transfers to your name.
Tax Benefits of Hire Purchase:
- You can claim capital allowance and deduct the machinery cost from taxable profits.
- Interest paid on instruments is deducted as a business expense.
- You can reclaim the VAT if your business is VAT-registered.
2. Finance Lease
The lease allows you to use the machinery and make rental payments at the same time. In this scenario, ownership remains with the lender, and you can return the asset upon the agreement’s end.
Tax Benefits of Finance Lease:
- Rental payments are tax-deductible at the source.
- VAT is payable on every payment but reclaimable for VAT-registered businesses.
3. Operating Lease
The lease period is shorter and does not cover the full cost of the asset.
Tax Benefits of Operating Lease:
- Monthly payments act as operating expenses and are 100% tax-deductible.
- Similar to a finance lease, VAT-registered businesses can reclaim the value-added tax.
How Does Asset Finance Reduce the Tax Burden?
To know how your company can enjoy tax benefits on asset finance, you first need to understand “capital allowances.” It is a tax relief that allows you to reduce a certain amount of costs on assets that form part of your taxable profits. By claiming the allowance, your profit reduces by up to a specified percentage of the cost of the new assets.
Let’s understand this with a quick example:
- Suppose your profit is £10,000 and you have purchased new equipment worth £2,000.
- You can deduct up to 25% (i.e., £500) from the total profit.
- Now, your taxable profit is £9,500. Automatically, you have to pay less tax than before.
The best part? If you leverage asset finance that’s divided equally for months, your cash flow improves while saving on tax.
Which Assets Qualify for Capital Allowance?
Capital allowance is a perk that everyone wants to enjoy. But are all your assets eligible for it?
Every plant and piece of machinery is eligible for a capital allowance tax relief, provided it is:
- Purchased directly
- Bought through Hire Purchase
- Supplied through a long funding lease
Remember that you cannot claim capital allowance for a short lease. In that case, your only benefit is low rental charges.
What are the Different Types of Capital Allowances?
Your tax depends on the type of capital allowance you choose. In case any of your assets qualify for more than one allowance, you can select one of the following:
1. Annual Investment Allowance
The allowance deducts the complete cost of the equipment from your taxable profits. Although most plants and machinery qualify for AIA, equipment such as cars, buildings, and pre-owned/leased assets doesn’t. You can claim up to £1 million on specific plants and machinery.
2. First-Year Allowance
You can claim a 100% tax deduction on assets purchased within the same financial year. Businesses that pay corporate tax are only eligible for complete expensing. The following assets are eligible for this capital allowance:
- Assets used at gas refuelling stations
- Electric cars
- Commercial cars with zero emission
- Equipment for EV charging points
3. Writing Down Allowance
You can leverage this capital allowance in case your plant and machinery don’t qualify for AIA, or you have already claimed the maximum amount. In this case, the tax deduction depends on the asset and is spread throughout its lifespan.
4. Enhanced Capital Allowance
The ECA focuses explicitly on investments in eco-friendly vehicles. Any vehicles purchased after 1st April 2021 are eligible for this capital allowance.
5. Special Rate Pool Allowance
The allowance offers tax benefits on assets that don’t fall under the plant and machinery category. You can claim a 50% tax benefit on such assets in the year they were purchased.
What Are the Other Reasons to Choose Asset Financing?
Asset finance not only offers tax relief but also other benefits. Here is why it is the best financing option for your company:
- Flexible Repayment Option
Whether you wish to pay early or overpay monthly EMIs, all repayment options are available for you. Some providers allow you to pay an excess amount in certain months when you have a surplus cash flow.
2. Better Cash Flow Management
Not every business, especially a startup, has surplus cash to outright invest in expensive assets. In that scenario, asset finance helps you access the machinery and clear your monthly dues.
3. Access to the Latest Machinery
Even if the cash flow is tight, you can invest in high-tech machinery through an asset finance company. By gaining quick access to the latest technology, you can generate more profits and clear your dues.
Leverage Tax Benefits Through Asset Finance
Investing in new machinery through asset finance not only supports a low cash flow situation but also increases your tax savings opportunities. If you are planning to buy new plants and equipment for your company, choose a partner that offers easy repayment options and 100% transparency. TRK Finance does not charge any hidden fees and provides a 24-hour approval. You will get funds credited to your account the same day, so you can begin setting up your machines. We also offer other financial services, including:
- Short-term loan to fulfil urgent cash requirements
- Flexible business loan to grow your company
Conclusion: Avail Asset Finance Solution Securely
Investing in new machinery through asset finance is a wise decision. However, you also need to ensure that the company you are securing the loan through is also reliable. TRK Finance is a loan agency in the UK that provides secure funds from £10k to £1m+. We give approval in 24 to 48 hours, along with competitive rates. It allows SMEs and startups to easily upgrade their commercial equipment. You can connect with the team to learn more about asset finance and take advantage of tax benefits on new machinery.
