Paying too much tax?  Thinking of buying new equipment?  Read on….

With the end of the tax year on the horizon, some careful planning at this stage could make a significant difference to the size of your next tax bill.

The Annual Investment Allowance 2023/24 is £1,000,000.

Key points to consider when ordering new equipment:

• 100% of the purchase price can be offset against taxable profits for this financial year in line with the Annual Investment Allowance.
• The equipment will need to be delivered, invoiced and the finance agreement activated before the last day of your tax year to qualify.
• You don’t need to pay cash, the same tax savings are available when using the right type of finance agreement.

The Annual Investment Allowance

The Annual Investment Allowance 2023/24 enables dentists to offset the full capital cost of buying equipment against their taxable profits for this financial year.

Qualifying equipment includes:

• Intraoral scanners
• OPGs/CBCTs
• Dental Chairs
• Cabinetry
• Handpieces
• Suction pumps/compressors
• Computers/laptops
• TV screens
• Surgical kits
• Autoclaves
• Furniture

In fact, most items that aren’t considered fixtures and fittings qualify.

Example 2022/23

Let’s consider a self-employed dentist with pre-tax profits of £100,000, paying income tax at 40% on profits above £50,000 and purchasing equipment at a cost of £25,599 plus VAT (£30,718)

(A) Before buying the equipment, their tax calculation would be as follows:

Pre-Tax Profit                    Tax Rate               Tax Due

£12500                                  0%                          £0

£37500                                  20%                        £7500

£50000                                  40%                        £20,000

Total tax due = £27,500

(B) After buying the equipment the figures would be:

Pre-Tax Profits                  £100,000

AIA on cost                         £30,718

Tax now based on            £69,282

So:

Pre-Tax Profit                    Tax Rate               Tax Due

£12500                                  0%                          £0

£37500                                  20%                        £7500

£19,282                                 40%                        £7,712

Total tax due = £15,212

Tax Saving £12,288

Self-employed dentists paying tax on account could apply for a reduction to their next payment whereas dentists practicing through a company would get the saving nine months and a day after their tax year end.

It’s important to note that for dentists practicing through a company the effective tax rate would be 19% and for self-employed on lower incomes the rate would be 20%.

The potential saving therefore depends upon the business entity in question (sole trader, partnership, company), the pre-tax profit being made and any other qualifying capital expenditure in the period.

Complex partnerships that include companies do not qualify for the AIA.

Financing Equipment

The good news is that these tax savings and more are available by buying the equipment on finance.

Equipment paid for on a Hire Purchase agreement qualifies for the Annual Investment Allowance in the same way as cash, in addition to which the interest and fees can be offset as allowable expenses.

There’s no need for a deposit, simply pay monthly in advance and spread the cost over up to seven years.  At the end of the agreement you’ll own the equipment outright.

Let’s use the above example (self-employed dentist making £100,000 of pre-tax profit, paying 40% Income Tax on £50,000) and look at the potential tax savings of Hire Purchase over 60 months:

Equipment cost                                 £25,599 plus VAT (£30,718)

Loan (including VAT)                       £30,718

Monthly Payments (Ind)                60 x £599.94

Doc Fee/Purchase Fee                   £149/£60

Total Payable                                    £36,205.40

In this case, the tax saving is split between the capital and the finance costs:

Qualifying Expenditure                  Potential Tax saving

Capital Cost (AIA)                             £30,718                                                 £12,288 (this financial year)

Finance Costs                                     £5,487                                                   £2194 (spread over the term)

Total                                                      £36,205                                                 £14,482

Net of tax relief, the effective monthly cost in this example = £362.05

In conclusion, the cost net of tax relief, of buying equipment is easily affordable for most dentists.

Last key point is that the transaction cannot be backdated so it really is important to act now.

TeleLease is an asset finance provider, not a tax advisor and as such the purpose of this illustration is simply to highlight the potential tax savings available when buying equipment.

We strongly recommend that you seek advice from a qualified accountant or professional tax advisor before entering into a finance agreement to ensure that the calculations are relevant to the circumstances of your practice.