Capital allowances on hire purchase (HP): Things to be aware of

The goverment’s full expensing scheme makes asset finance a more tempting prospect for businesses seeking growth.

Many businesses, whether they are in the early stages of trading, pursuing a growth strategy or have been around for a while and need to replace old machinery, will consider hire purchase as a way of buying essential assets.

It’s also one of the most accessible and easily understood forms of credit: the “title” of whatever you’re buying – a car, work van, machinery, office furniture – remains the property of the lender for a fixed term. This means they can repossess the item if you do not keep up payments. The final payment will include an OTP (option to purchase fee), usually about £100. This is built into all HP agreements. Once that is paid, the title then transfers over to the customer.

Spreading the cost this way makes it possible for businesses to have the full use of assets they need to carry out work, without the need for a major capital outlay upfront.

Changes to the tax system

With recent changes to the tax system, there are now even more incentives for businesses to explore hire purchase and asset finance.

Tom Floodgate, Head of Asset Finance at Swoop, explains:

“Hire purchase is the commitment of buying an asset so even if spread over a period of five years, the full amount is still eligible for capital allowances. These capital allowances are a form of tax relief which allows you to deduct from your corporation tax, ultimately giving you more money at the end of the year.”

Expenses which are eligible for capital allowance are wide ranging: most business critical assets qualify under present rules. 

Tax benefits of asset finance

When you have the equipment you need, you can generate more income for your business by carrying out more work. Asset finance makes large purchases more affordable and has significant tax benefits.

As your individual business circumstances will vary, you should speak to your accountant about the full pros and cons of the tax benefits of asset finance. 

You will also benefit from the UK government’s full expensing scheme, which allows you to write off 100 percent of the cost of new equipment against tax in the year of purchase. In previous years, you could only claim against the depreciating value of your asset; in plain English, the new scheme puts more money in your pocket faster.

Read more: our comprehensive guide on full expensing and how you might be impacted.

Tom Floodgate says:

“For founders who see the opportunity to grow, asset finance puts the ability to meet demand within reach. As well as the equipment, you often find deals that include maintenance, training and other perks. When you factor in the new tax rules, asset finance really does give you more bang for your buck.”

If you want to learn more about asset finance, we’re happy to help. Read our guide on all types of asset finance or register your business with Swoop to understand options specific to your business.