Buying Equipment for Business Tax
To claim or not to claim … buying equipment for your business
One of the great myths of running a business is that expenses can be claimed for just about anything. “Sure can’t you just write that off,” is the throwaway comment of the pub expert. That’s not the case though, and Revenue has very strong rules about what can and can’t be claimed for where tax is concerned. Buying equipment is a potential sticky wicket which we’ve tried to simplify for you below.
Capital allowances and deductions
A company can claim certain costs and expenditure against its profits to reduce the amount of tax it pays. Contrary to popular belief, these expenses do not include business entertainment expenses or items of capital expenditure. Capital expenditure is money a company spends on buying or maintaining land, buildings or equipment.
Generally speaking, the cost of purchasing capital equipment in a business is not a tax-deductible expense. However, a company can get tax relief on certain capital expenditure in the form of capital allowances.
Capital allowances are usually calculated on the net cost of the business asset. There are different rates available depending on the type of asset. A company can claim capital allowances on a number of different items including:
- Plants and machinery
- Motor vehicles
- Computer software
Plants and machinery mean machines, equipment, furniture, some fixtures, computers, cars, vans and other similar equipment you use in your business. There are some special rules for cars.
Any way you pay
Generally capital allowances are not affected by the way in which a business pays for the purchase. If for example an asset is bought on hire purchase (HP), allowances are normally given as though there were an outright cash purchase. However, that isn’t the case with finance leases. These are often considered to be an alternative form of ‘purchase’ and for accounting purposes they count as assets. Instead, the accounts depreciation is usually allowable as a tax-deductible expense.
Capital allowance can be claimed at 12.5% a year over eight years for plants and machinery. For example, if a machine cost €25,000 excluding VAT, the company can claim a wear and tear allowance of €3,125 (12.5% of the €25,000 cost) that year. It is treated as a trading expense in calculating profit, just like any other trading expense, like wages for example. The company can claim the same amount each year for the next seven years provided the machine is used solely within the business.
Any interest or other finance charges on an overdraft, loan, HP or finance lease agreement to fund the purchase is a revenue tax deductible business expense. It is not part of the capital cost of the asset.
If a business rents capital equipment, often referred to as an operating lease, then as with other rents this is a revenue tax deductible expense so no capital allowances are available.
Annual Investment Allowance (AIA)
The AIA provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. The maximum amount of the AIA depends on the date of the accounting period and the date of expenditure. Expenditure on all items of plant and machinery are pooled rather than each item being dealt with separately
The Accelerated Capital Allowance (ACA) is a tax incentive scheme that promotes investment in energy efficient products and equipment. A company can claim an Accelerated Capital Allowance (ACA) of 100% for the following:
- Energy efficient equipment including electric and alternative fuel vehicles
- Gas vehicles and refuelling equipment
- Equipment in a creche or gym provided by the company to employees
The ACA can be claimed in the first year the asset is used in the business.
Purchasing equipment is a major strain on a company’s finances and one way to free up much-needed cash is to use cashflow solutions like leasing and invoice finance. GRENKE are responsible and trusted providers of both these options.
Disclaimer: GRENKE is not a tax advisor, please consult with Revenue or a Tax advisor for the latest changes to Tax legislation.