25 Jul 2021
If your client needs to purchase equipment or machinery for their business but they don’t have the cash to buy it up front, hire purchase could be just what they need. What’s more, hire purchase can be used as part of the government’s super-deduction capital allowance.
Assets are a lifeline for many companies. From refrigeration units to IT equipment, they can make or break a business. But the reality is that if an asset breaks, many business owners simply don’t have the ready cash to be able to replace it in time. The same goes for assets required for growth in order to meet an increase in customer demand.
That’s where asset finance comes in. Hire purchase is a type of asset finance that can enable your client to buy an asset by paying for it in installments. Once it's paid off, they're the legal owner, and in certain agreements the asset will appear on their balance sheet at the start of the term. A 10% deposit is usually required, and the VAT is paid upfront.
The super-deduction was announced by the Chancellor in the 2021 Spring Budget. It allows qualifying businesses to leverage a 130% capital allowance when they buy a new asset or machinery. It can lead to huge savings, as outlined in our example below. You’ll see that the super-deduction also covers the interest payments associated with the finance.
Fortunately, hire purchase agreements are allowed under the super-deduction rules. This presents a huge opportunity for businesses to use hire purchase to access the scheme, which is set to run until 31 March 2023.
Here’s what it looks like in action…
Imagine your client buys an asset at the value of £100k. Usually, the Writing-Down Allowance of 18% would allow them to make savings of £8,524 over three years. Yet with the super-deduction, the relief is confined to the first year and is 130%. This equals a return of £24,700 on your £100k asset (+£16,176).
The super-deduction is structured in a similar way to the Annual Investment Allowance.
4yrs 5% hire purchase from lender
Interest on a £100k hire-purchase agreement over the period would be £10,299
In this instance the £24,700 tax relief from the super-deduction is enough to cover the interest on the loan twice. In this sense, the first year is free.
The super-deduction covers a lot of equipment and machinery, however there are a few exemptions. Qualifying assets include:
IT hardware and software
Trucks and vans (not cars)
Electric vehicle charge points
Construction plant and machinery (including cranes and diggers)
Computer numerical control (CNC) and other manufacturing and engineering equipment
Non-qualifying assets include:
Used or second-hand assets
Assets subject to a lease
Structures and buildings
Bear in mind that while you can use hire purchase to qualify for the super-deduction, equipment leasing does not qualify. Leasing allows businesses to rent an asset for a period of time. It can be returned it at the end of the lease agreement, purchased outright or upgraded to a newer version/model.
Yes! Funding Options is partnered with over 120 business finance lenders, including hire purchase finance lenders. Using a combination of market expertise and technology, we’ll search the market to locate the right funding options for your clients.
Join our advisory platform, Connect, to ensure your clients have access to the funding they need to plan, trade and grow with confidence. We’ll provide your clients with help throughout the process, from application to funds in the bank.
Find out how we can support your clients' hire purchase finance requirement or any other type of business finance requirement here.Get asset finance
Head of Commercial
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