When you’re running a business, staying ahead often means investing in the right equipment. But buying equipment outright can put a real dent in your cash flow. That’s where equipment financing can be helpful, offering a practical way to get what you need without draining your working capital. However, many organisations overlook the tax implications, which is a significant advantage beyond the cash flow benefits.
In this blog, we’ll walk you through how equipment finance can affect your taxes, the potential deductions you could claim and what to be mindful of when planning your next purchase.
The Tax Benefits of Equipment Finance in the UK
Depending on the type of agreement you choose, you could be in line for some valuable tax relief. Here’s what that might look like:
Claiming Capital Allowances (Hire Purchase)
If you choose a hire purchase agreement, you’re considered the owner of the equipment from the start, even if you’re still making monthly payments.
This means you can claim capital allowances, including the Annual Investment Allowance (AIA). That allows you to deduct the full cost of qualifying equipment from your taxable profits – up to a generous limit.
For example:
If you purchase £20,000 worth of machinery and it qualifies for AIA, you could deduct the full amount from your profits. That might knock up to £3,800 off your corporation tax bill (assuming the 19% rate).
Lease Payments as Tax-Deductible Business Expenses
If you’re using an operating lease or finance lease, it’s a little different. You don’t technically own the asset so capital allowances don’t apply, but the good news is, you can usually deduct the lease payments as operating expenses.
That means you’re still getting tax relief, just spread out over the lease term instead of in one big go.
Check whether your lease is classed as a finance lease or an operating lease, as that can impact how it’s treated in the books. A quick chat with your accountant can save you a headache later.
VAT Considerations
When leasing or financing equipment, VAT can usually be reclaimed if you’re VAT-registered. For hire purchase agreements, you may pay VAT upfront on the full purchase price. For leases, VAT is typically applied to each payment, which may improve cash flow.
Offsetting Interest on Equipment Loans
If you finance your equipment using a business loan, the interest you pay on that loan is usually tax-deductible.
While it’s not a huge saving on its own, every bit helps when it comes to reducing your overall tax liability.
What You Should Be Aware Of
Tax benefits are great but it’s not just a case of sign-and-save. Here are a few things to keep in mind:
- Not all equipment qualifies for capital allowances.
- Whether or not you own the asset (versus leasing it) affects how it’s taxed.
- You’ll need to keep solid records of your finance agreements, payments and any VAT.
- Always check in with your accountant before making a big purchase. They’ll make sure it’s structured in the most tax-efficient way for your business.
Quick Comparison Table: Tax Deduction by Finance Type
| Finance Option | Own the Asset? | Capital Allowances? | Tax-Deductible Payments? | VAT Treatment |
| Hire Purchase | Yes | Yes | Interest only | VAT upfront on full amount |
| Finance Lease | No (usually) | No | Yes – monthly payments | VAT on each payment |
| Operating Lease | No | No | Yes – monthly payments | VAT on each payment |
| Equipment Loan | Yes | Yes | Interest only | VAT on asset purchase |
So, is equipment financing just a way to protect your cash flow? Sure. But it’s also a smart move from a tax planning perspective.
Whether you’re a growing SME or an established company looking to expand operations, choosing the right type of finance could save you thousands on your tax bill.
Business Finance House specialises in providing tailored funding solutions for UK businesses. Speak to our team today and let’s find the best-fit option for your business.
