CAPITAL ALLOWANCES - 03.04.2024

Employers or employees - who gets tax relief for equipment?

Two tax issues

There are two main tax issues that need to be considered: tax relief, in the form of capital allowances (CAs) for the cost of the new equipment, and potential tax and NI charges that might apply for any private use.

Capital allowances

Companies and employees (including directors) are entitled to claim CAs for the purchase of equipment which they use in their trade or employment. Companies are allowed corporation tax relief for CAs at 19% or 25% and directors and employees gain income tax relief at the highest rate of income tax they pay, which is between 8.75% and 45%. It might seem easy to decide who should make the purchase and claim the CAs, but it’s not as simple as it seems.

Financing the purchase

CAs can only be claimed by the person who incurs the cost of the equipment. This means the only way for a director to be entitled to CAs without meeting the cost from private funds is for the company to provide the money to the director who in turn makes the purchase. Naturally, this usually has tax (and possibly NI) consequences.

Director buys

The company could lend the director the money but eventually the loan will have to be repaid and so end up costing the director. The company could pay them additional salary or dividends to fund the purchase, but this results in corresponding income tax/NI liabilities for the director, which makes the arrangement tax inefficient. An alternative is for the director to buy the equipment and for the company to reimburse them. The trouble is this method falls down because it means that the director has not ultimately incurred a cost and so is not entitled to claim capital allowances.

Trap. Another factor to be considered is VAT. Assuming the company is registered it can reclaim the VAT if it makes the purchase whereas if it’s made by the director a reclaim isn’t possible.

Company buys

All the factors point to the company route being the better option. It can buy the equipment and claim CAs without having to worry about any tax and NI complications that arise where the director makes the purchase using funds derived from the company. A special income tax exemption also helps to reinforce the company purchase option as the way to go.

Trap. Usually, where an asset is provided by an employer (a company) to an employee or director and there’s private use, it counts as a taxable benefit in kind. This could tip the tax efficiency in favour of a purchase of equipment by the director. The good news is that a special exemption can apply that negates the benefit in kind.

Tip. As long as the main reason for a company buying equipment is for its business and the director’s private use is insignificant, it won’t count as a taxable benefit. Overall this makes the company purchase route the most tax efficient (see The next step ).

For an example of how company purchases are more tax efficient, visit https://www.tips-and-advice.co.uk , Download Zone, year 24 issue 13.