Super Deduction and Partial Exemption

With the availability of Capital Allowance “Super Deduction” on the purchase of new equipment, the decision to purchase equipment outright rather than leasing maybe, temporarily, more attractive from a cash flow point of view.

Purchasing sight testing or dispensing equipment outright can often mean that the VAT cannot be reclaimed as the “de- minimis” threshold is exceeded. For this reason, many businesses opt to lease new equipment thereby spreading the impact of the VAT over a number of years. This is in an attempt to reclaim all of the VAT paid over the period of the lease. However, adding a new lease to existing lease payments increases the exempt VAT in each quarter and if there are multiple leases in place you may still breach de-minimis. This can go on for the entire period of the lease(s) whereby you are over de-minimis for multiple years. Leasing equipment means that Corporation Tax relief is claimed annually over the period of the lease based on the capital repayments and interest suffered.

The alternative to leasing equipment is to purchase outright by way of cash, a bank loan or hire purchase agreement and accept that the VAT will be lost. Up until recently the maximum tax relief would have been 100% of the value of the asset at the corporation tax rate in force, currently 19%. Quite often the corporation tax saving would not offset the VAT lost. Now, with the Capital Allowance “Super Deduction” the corporation tax saving can potentially cover the lost VAT and result in an overall cash saving.

Consider a purchase of an “OCT” machine costing £40,000 plus VAT of £7,000.

With the new Super Deduction, corporation tax is saved on £61,100, i.e. £47,000 x 130%. This represents a tax saving of £11,609. Although the VAT on the machine is likely to be lost (along with other exempt VAT as calculated
using partial exemption rules) this is potentially less overall than the £11,609 corporation tax saved. Furthermore, the loss of the VAT happens in one year only and the de-minimis resets in the next VAT year.

You must also bear in mind that if you were to sell the new equipment within a short period of time then you have to pay tax on any proceeds. If corporation tax rates increase, then this will significantly reduce any benefit from the initial “super deduction”.

Remember that the VAT year runs to the quarter ending March, April or May depending on your VAT stagger and assuming you have not requested a change in VAT year. Therefore, purchasing an item of equipment costing £40,000 plus VAT just before your company’s financial year end can result in a significant corporation tax saving which outweighs the loss of the VAT. It also enables you to reset your de-minimis threshold in the next VAT year thereby not restricting input VAT claims in future years (if you are usually under de-minimis).

Conversely if you purchase the equipment at the beginning of your accounting year, there will be a significant delay before the corporation tax benefits is achieved. Timing of the expenditure is therefore crucial.

If you are generally over de minimis, then purchasing sight testing equipment outright will generate the additional corporation tax saving with no additional impact of lost VAT.

Get in touch with Martin Lanceley, one of our expert ophthalmic accountants, for further advice or information.

2nd Mar
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