The tax rules include a special system of tax relief – capital allowances – for equipment used in a business. It can apply to purchases made personally or by the business. Which of these is most tax efficient?

Company or owner manager

As the owner manager of a company that needs new equipment, but doesn’t have the cash to pay for it, you could consider financing the purchase personally. Even then you need to decide whether to provide your company with the cash to do it or buy the machinery personally and let the company use it. In both situations tax relief in the form of capital allowances (CAs) (HMRC’s equivalent to the cost of depreciation) may be allowable.

Capital allowances

CAs are offered more or less on the same terms to businesses as individuals. Generally, each can claim tax deductions at the same rate, but to qualify companies need to use the equipment in their business, while directors or employees must use the equipment to carry out the duties of their job. This distinction can be a vital factor.

Example 1. John is director of Acom Ltd, whose role is admin and sales. Acom needs a new machine for the factory. If John buys it personally and Acom’s employees use it in the company’s trade, he is unlikely to be able to persuade HMRC that it’s required for his duties as a director meaning neither he nor Acom will get CAs.

Example 2. Fred is a director of Bcom Ltd, which is a one-man company. It too needs a new machine, which Fred buys. He’ll use it, not in his role as director, but in his job which is to produce the widgets sold by Bcom. Fred can claim CAs.

Trap. Note that if the “machinery” bought by an employee or director is a car, they can’t claim CAs even if they use it in their job.

Rates of CA

Directors, employees and businesses are entitled to CAs at the same rates. For machinery, if the cost is within the annual investment allowance (AIA) limit each can claim a tax deduction from their profit/income for 100% of the cost for the year of purchase. Otherwise they can claim a deduction of 18% of the cost each year on the reducing balance. The potentially big difference is that the highest rate of tax relief allowed for the deduction is 19% for companies, but up to 45% for directors and employees, but there are other factors to consider.

Repayment and VAT factors

So you’re not out of pocket your company will need to pay you income to cover the cost of the machinery – dividends are the most tax-efficient method. (It could reimburse you by paying rent for using the machinery, but that’s a different scenario altogether.) Taking account of this extra income and the higher rate of tax relief for personal purchases, a company purchase produces a better financial result, especially if your company can reclaim the VAT paid on the cost which, as an individual, you cannot.

Tip. If your company can’t raise the funds to purchase machinery, but you can, don’t buy it personally and claim the tax deductions against your income. Instead, lend the money to your company so it can make the purchase.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.