Tax relief on equipment you haven’t paid for (yet)

Capital allowances

Tax relief in the form of capital allowances (CAs) is currently rather generous; the annual investment allowance entitles businesses up to £1m CAs for purchases of plant and machinery, and companies can obtain further relief through full expensing without limit. However, just because 100% relief is up for grabs doesn’t mean you can sit back on your laurels when it comes to tax planning. The timing of payments and purchases can delay your 100% tax relief by up to a year if you’re not careful. Whereas, if you’re tax savvy, you can claim tax relief early, before some of the payments have even been made.

Hire purchase

Special rules apply where payments for equipment are spread under a hire purchase (HP) agreement. Any amount that you pay upfront is eligible for CAs for that financial year, but you can also get relief for future payments for the financial year that the equipment begins to be used in the business. This is best illustrated with an example.

Example. Acom Ltd prepares its accounts to 30 June. On 1 June 2026, it entered into an HP contract to acquire printing equipment. The cash price is £100,000, but under the terms of the HP agreement, Acom Ltd had to pay a total price of £125,000. A deposit of £20,000 is paid on 1 June, and qualifies for CAs for the year ended 30 June 2026. The balance of £105,000 is to be paid in 25 monthly instalments, representing monthly payments of £1,000 hire charge and £3,200 capital. The equipment was delivered on 1 July, and brought into use by 31 July. The entire balance of capital expenditure (£80,000) qualifies for CAs in the year to 30 June 2027.The element of the monthly instalments that represents hire charges will be allowed as a trading deduction in the period they are incurred.

Ensure new HP equipment can be delivered and used in the business before year end to accelerate CAs for future capital payments.

Other delayed payments

A delay in CAs can occur where you make a purchase but payment doesn’t need to be made immediately.

Where the purchase agreement allows for a payment to be made more than four months after the purchase becomes unconditional, CAs can only be claimed for the financial year in which payments for the equipment are made. This is only an issue if the purchase and payment dates straddle your year end.

Example. Bcom’s accounting year end is 31 December. On 1 December 2025 it commits to buying new machinery for £200,000. The purchase contract requires Bcom to pay £30,000 at the time of the order and the balance within 30 days of installation. The installation is completed on 30 May 2026. Acom can claim CAs of £30,000 for the year to 31 December 2025 but isn’t entitled to CAs on the balance of the cost until the following financial year, thus delaying tax relief.

When agreeing terms for large purchases of equipment near the end of a financial year, keep in mind the four-month rule. If the timing of payment is going to cause CAs to be pushed into the next financial year, consider asking the supplier to change its terms such that payment is required within four months irrespective of the delivery date. Even if payment is made later than this, CAs can be claimed in the financial period in which the purchase contract is signed. Otherwise, avoid making the purchase close to your year end.