How to make the most of the super-deduction capital allowance with hire purchase

From IT software to refrigeration units, assets are a lifeline for many businesses. In some cases, they can be the difference between success and insolvency.

The super-deduction capital allowance was one of the highlights of the spring budget 2021. It enables qualified companies in the UK to benefit from a 130 per cent capital allowance when they purchase new equipment or machinery for their business.

You’re probably aware of the super-deduction, but how many times has it featured in your conversations with clients?

Purchasing a high value asset outright isn’t a reality for many businesses. But when paired with hire purchase finance, the super-deduction can lead to huge savings.

Hire purchase finance is a type of asset finance used to make a purchase in installments over a set term. Once the installments have been paid, the business owns the asset, and in certain agreements it appears on its balance sheet at the start of the term.

Hire purchase makes sense for businesses that don’t have the capital required to buy an asset up front. What’s more, the super-deduction relief covers the interest payments.

Combining hire purchase with the super-deduction

Hire purchase agreements are eligible under the super-deduction rules, so is there an opportunity for more businesses to use hire purchase in conjunction with the super-deduction? When you look at the maths, the answer is a resounding ‘yes’.

Let’s say your client purchases an asset worth £100,000. The typical Writing-Down Allowance of 18 per cent enables them to realise £8,524 over a three-year period.

With the super-deduction, however, the relief is confined to the first year and is 130 per cent, providing your client with a return of £24,700 on the £100,000 asset (a difference of £16,176).

As an accountant, it’s time to start exploring the benefits of hire purchase finance and the super-deduction with your clients. As you can see, it’s not dissimilar to the Annual Investment Allowance (AIA) structure.

Loan profile - lender example:

• Four years 5 per cent hire purchase from lender
• Interest on a £100,000 hire-purchase agreement over the period would be £10,299

The £24,700 tax relief from super-deduction will pay the interest on the loan twice over (in other words, the first year will be free).

What equipment does the super-deduction cover?

A broad range of asset types make the super-deduction list:

• IT hardware and software
• Office furniture
• Trucks and vans (not cars)
• Solar panels
• Agricultural machinery
• Electric vehicle charge points
• Construction plant and machinery (including cranes and diggers)
• Refrigeration units
• Computer numerical control (CNC) and other manufacturing and engineering equipment
• Compressors

Bear in mind that the following assets don’t qualify for the super-deduction:

• Used or second-hand assets
• Assets subject to a lease
• Cars
• Motorbikes
• Structures and buildings

To qualify for the super-deduction, hire purchase finance must be used - not leasing. If your client opts for leasing they won’t be able to leverage the super-deduction benefits.

How can Funding Options help?

Funding Options is partnered with over 120 business finance lenders, including a number of 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.

Thomas Boyd, head of advisory at Funding Options