Hire purchase and super-deduction – the asset finance opportunity
Capitalise CEO, Paul Surtees highlights the opportunity within hire purchase.
One of the stand-out initiatives from the recent Spring Budget 2021 was the announcement of the super-deduction capital allowance – a way for qualifying UK limited companies to enjoy an 130% capital allowance when buying new assets and equipment for their business.
Although there’s been plenty of airtime dedicated to super-deduction, what’s interesting is the lack of take-up when it comes to factoring this new capital allowance into client conversations.
Paul Surtees, Capitalise CEO, highlights the potential opportunity for combining super-deduction with hire-purchase finance to create significant capital savings.
Embracing the super-deduction opportunity
As an accounting community, we’ve had time to think about the implications of super-deduction. But have we really cottoned on to why this new capital allowance is so super?
When we speak to asset finance lenders, they’re seeing a lot of transactions that are linked to the super-deduction opportunity. But this opportunity for using hire purchase in conjunction with the super-deduction capital allowance is not something we’re seeing here at Capitalise; which means it’s an opportunity that the accounting community has yet to embrace.
So, why the reticence? Super-deduction is, after all, an amazing capital giveaway.
Under the usual WDA model, with a £100k asset you would realise £8,524 over three years, with the capital allowance at 18%. With the way that super-deduction is designed, that relief is all sat in the first year and at 130%, giving you a £24,700 return on the asset that’s been purchased at £100k. That’s a difference of £16,176.
That’s the headline opportunity. And when you factor in that hire purchase agreements are eligible under the super-deduction rules, there’s a clear conversation to be had with clients.
What’s needed is for advisers to grab this opportunity with both hands and really start putting some impetus behind the benefits of super-deduction and hire purchase for their clients.
Super-deduction in action
Super-deduction is a far-reaching, positive initiative. But what’s not being flagged up enough is the potential for business clients to make use of hire purchase when taking on their new assets.
Businesses need new assets and equipment to grow and to stabilise their recovery, but they won’t have the capital, at present, to purchase these assets. Because of this, the hire purchase route makes a lot of sense, and with the super-deduction relief covering your interest payments, you can already see that hire purchase + super-deduction will begin to pay for itself.
Loan profile, Tier 1:
- 4yrs 5% hire purchase from Tier 1
- Interest on a £100k hire-purchase agreement over the period would be £10,299
- The £24,700 relief from super-deduction will pay the interest on the loan twice over
- Or...effectively gives you your first year for free
In reality, you’ll probably get about 11 months of the first year of the hire purchase agreement capital and interest free, because of the capital allowance.
If you look at a Tier 2 lender, the interest is still covered.
Loan profile, Tier 2:
- 4yrs 10% hire purchase from Tier 2
- Interest over the period would be £20,749, which is easily covered by the £24,700 relief
- By going the hire purchase + super-deduction route, the result is that you have money left over…
What assets are covered by super-deduction?
As you can see, super-deduction is a pretty powerful mechanism. It also probably feels quite familiar, as it replicates some of the Annual Investment Allowance (AIA) structure.
The list of assets which are eligible for super-deduction is relatively broad, and it’s also clear which types of financing and which assets don’t meet the eligibility test.
Eligible assets - including but not limited to:
- 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
Ineligible assets - that won't qualify for super-deduction
- Used or second-hand assets
- Assets subject to a lease
- Structures and buildings
Rules re financing:
- Hire Purchase not leasing
- Limited companies only
- No refinancing
The important takeaway here is that you must go the hire purchase route and not try to use leasing. Leasing just won’t work under super-deduction and would mean the client missing out on the relief and all the benefits that go with this.
Putting the hire purchase opportunity into action
As we’ve seen, combining super-deduction and hire purchase has massive potential for delivering capital savings for your clients. In Part 2 of this blog post, we’ll hear how other accountants are having these conversations and ways to put the opportunity into action.
If you’d like to maximise the hire purchase and super-deduction opportunity, get in touch to find out more.