If you’re planning to purchase a new property or equipment for your business, the chances are you’ll need to raise funds in some way.
So let’s look at the options, as well as how understanding the tax system can help make capital purchases easier.
Top funding options for property or new equipment
Funding can generally be achieved by taking on debt, bringing in investors or applying for a grant.
Borrowing – There are many mechanisms for borrowing money to fund business growth. The most well-known are bank loans, leasing or hire purchase, and each of these have sub-categories.
When borrowing, you don’t give up any equity but will face costs like loan repayments, interest and leasing fees depending on the type of borrowing you choose. You may also have to put up collateral.
In response to the economic difficulties caused by the coronavirus pandemic, the government launched a recovery loan scheme. This reduced lenders’ exposure to risk to encourage them to work with businesses.
Dozens of lenders have been involved, but the scheme finally closes on 30 June. So at the time of writing there may still just be time to access it. With much of the shock of the pandemic now thankfully behind us, there will still be an active lending market after this deadline though.
Investment – Bringing in investors is another common way of raising finance to grow a business. In return for equity (a share of the business), they will provide funding and sometimes other resources, like valuable experience and advice.
There are a number of sources of investment, including through venture capitalists/private equity, angel investors and, for larger businesses, via stock markets. Seeing a clear plan for how their funds will be used – such as buying equipment or property to stimulate growth – will be important for investors when deciding whether to part with their cash.
The thought of diluting your ownership can be off-putting, but if it helps grow the company overall, you may get more money in absolute terms – a smaller piece of a bigger pie.
Grants – Grants, issued by local and central government, are an ideal way to gain funding as you should not have to give up equity, pay interest or repay capital, so long as you comply with their terms.
Awarding bodies are normally trying to achieve specific outcomes. So the grants may be available to promote growth in a region or sector, among other things. As you would expect, there will be a detailed application process to go through.
How capital allowances can help
As well as using grants to help businesses invest, the government also uses the tax system by creating allowances and reliefs. One of these – capital allowances – let you offset some or all of the cost of certain investments against your corporation tax bill.
The most eye-catching of these at present is the super deduction, available until March 2023. This lets you claim 130% of the cost of qualifying equipment as a first-year capital allowance against profits on your corporation tax return. To put this in monetary terms, that’s £25,000 for every £100,000 invested. This is a retrospective benefit, but with careful planning can be factored into your funding plans.
Not everything qualifies for the super deduction: notably leases, second-hand equipment, cars and buildings do not. But there are other capital allowances, which although less generous, can help with investment in certain capital expenditure which does not qualify for the super deduction.
R&D tax credits for innovative businesses
R&D tax credits are another government scheme which has come to the fore in recent years. Like the super deduction, it allows businesses to claim an enhanced deduction of 130% against their corporation tax liability.
Qualifying expenditure for R&D tax credits is related to innovation rather than capital purchases, but once received you are free to spend the credit on whatever you want – including future equipment purchases. The average SME claim is worth £57K a year, so this can be a valuable source of funding if you qualify and factor it into your long-term plans.
If you would like to discuss funding and capital allowances for your business in more detail, please do not hesitate to get in touch.