Tax efficient borrowing

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Tax efficient borrowing

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Why should you read this guide?

Most businesses will need to borrow money at some point or another. To ensure that you do this the best way for your business you should always take advice about what type of borrowing to take. This will involve the best type of repayment method for your business, the best rate for your business and also the most tax efficient for your business. This guide will give you an idea on how to borrow money the most tax efficient way.

Background

Let's start by saying that every business is different and that although there are general bits of information this guide can pass on to you, you will need to seek advice on how this applies to your business. There are many ways to borrow money and the fact is that they will all cost you something to do this. Your role is to find the most efficient way for your business to borrow money. This is something you should research each time you need to make an acquisition or have a cash flow requirement.

Capital expenditure

Capital expenditure is when you buy an asset for the business. This asset could be, plant, machinery, computer equipment, vehicles, shop fittings etc. When you buy this asset you are able to able to claim it as a capital allowance and claim some of the expenditure against any profits the company make. The budget in 2007 announced a reform of the capital expenditure rules and introduced a new system allowing most businesses to write off up to £50,000 in the year of the expenditure. This means that if you are a qualifying business then you can spend up to £50,000 investing in your business (on qualifying assets) and take this whole expenditure off of any profit you make that year. This has the effect of reducing your taxable profits by up to £50,000. Effectively you are avoiding paying tax by investing in your business - which is what the government wanted.

It is worth pointing out that assets that you lease have their own rules attached depending on the length of time of the lease and the type of lease taken.

Loan interest relief

You are also able to deduct an amount of the interest that you pay on a loan from your taxable profit. This rate is equivalent to the rate of tax that you pay. For example if you are a sole trader and a 40% tax payer then you can deduct 40% of the annual interest paid on a loan from your taxable profits. Limited companies can do this equivalent to the corporation tax rate they pay.

Consult your accountant

Accountants often reach the point of writing the end of year accounts for their clients only to find that there has been a major change during that year. The frustrating thing for them is that they would have been able to offer advice on this change to ensure it worked for the business. If you are making a major purchase for the business then always talk this through with your accountant first. If you do not have an accountant that can give you this advice then you should find one that will - they will probably save you money in the long run. The best time to contact them is when you are considering the purchase. That way when you go to negotiate on price of the asset you will already know how you are going to pay for it. This information can then be used as part of the negotiation process.

Summary

Tax efficiency is one of the things in business you should leave to someone else. Why would you waste valuable thinking power on something that can be answered by your accountant in five minutes? Find a good accountant that you are sure you can work with and use them as a part of your business. This way when you make decisions you can be sure you are making the best ones for your business.

Further information

Obviously your accountant is a good place to start. You will also find a great deal of information on www.hmrc.gov.uk