Funding Opticians re Tax Position

When you’re buying new equipment or a new car, deciding which finance product is best for your practice can often be a complicated and daunting task and ultimately the advice of a good accountant is always recommended. There are various different tax issues to address and some specific issues relating to VAT that are unique to Optometrists.

There are, however, some basic rules that can help you decide. 

The Tax Implications 

When starting out there are two avenues that need to be explored, ownership or non-ownership. Some finance products give you ownership of the equipment for tax purposes and some do not. Examples of ownership products include Loans, Hire Purchase, Lease Purchase and Conditional Sale. Examples of non-ownership products are Leasing, Contract Hire and Rental.

If you chose any ownership product the equipment is treated in exactly the same way from an accounting perspective regardless of whether it is a Loan, Lease Purchase or Hire Purchase. For all purchases you can “write” the asset down against your profits and hence reduce your tax bill. For a typical asset you can write down 50% of the equipment cost in year one and 25% of the remainder in each of the subsequent years. An example of this is as follows;

Equipment cost £10,000
First year allowance £4,000
Second year allowance £1,500 (25% of £6,000) 
Third year allowance £1,125 (25% of £4,500) 

Total amount claimable in the first three years is £6,625.

In addition to the above you can also claim all interest paid in each year against your tax bill (typically £1,800 in the first three years)

Cars are treated differently again with only 25% being claimable in each year (including year one) and subject to a maximum of £3,000 although recent changes in the budget will allow accelerated allowances on low emission vehicles.

With regard to non-ownership products in most cases the monthly payments are claimable against your profit and loss in each year. It is therefore important to note your year-end when the asset is being purchased. If the asset is bought at the beginning of the year then up to twelve monthly payments can be claimed in year one.

If the equipment is purchased at the end of the year then as little as one payment may be claimable in year one.

For example
Equipment cost £10,000 
Monthly Payment £240.00 
First year allowance £1440.00 (6 payments for example) 
Second year allowance £2880.00 (12 payments) 
Third year allowance £2880.00 (12 payments)

Total amount claimable in the first three years is £7200.
Again cars are an exception and only a percentage of the monthly rental can be claimed against your tax bill. 

The VAT Implications

Because of the deminimis VAT issue there can be an added benefit in using a Lease product to buy equipment where the use of that equipment is for VAT exempt or non-attributable supply of goods.

When using a Lease the VAT on the equipment is not payable upon purchase as a lump sum but is in effect spread over the period of the lease. This smaller amount of VAT each month may be under the £625 deminimis limit set by the Customs and Excise and as a result may be partially or fully reclaimable. 

If the equipment was purchased using an ownership finance product then the VAT is paid up front and this amount may be over the £625 limit for that period (or the £7500 amount for the year). This may result in a smaller amount of the VAT being reclaimed. 

If in doubt, you should discuss your specific circumstances with a qualified accountant. 

If you would like to find out more about the various finance options available please contact exclusive benefits plc who will provide advice and quotations for all your requirements on 01934 85 33 33 or visit their website at www.ebplc.co.uk