You’ve done your research and finally decided to take the plunge and set up your own practice. Suitable premises? Check. Practice Name? Check. All that is left now is to start buying equipment and kitting out the practice. This article looks at the options you have with regards to financing – largely from a tax angle. It also looks at tax relief on such expenditure, how it is obtained, and why careful planning is key…

Expenditure can usually be defined as one of three types:

● Revenue – on which tax relief is obtained immediately as it reduces your taxable profit, thus reducing the amount you pay tax on and therefore obtaining tax relief at your highest rate of income tax.

● Improvements – expenditure such as erecting walls, building extensions etc do not get income tax relief. These improve the actual property, so are added to that. Then, if you sell the property, you will get tax relief on any relevant improvements, as it will reduce the chargeable gains.

● Capital – on which tax relief is obtained by way of capital allowances. The capital allowances, which you claim, then reduce your taxable profit, thus reducing the amount you pay income tax on and getting tax relief at your highest rate.

The rules on capital allowances changed from April 2008 and then again from April 2009. Currently you have available to you an annual investment allowance (AIA) of £50,000. This amount is reduced/increased for longer or shorter accounting periods. Therefore, say if you set up a practice on 1 February 2009 and your first accounts were due to be prepared up to 5^th April 2010 (an accounting period of 429 days) the AIA available to you would be (429/365*50,000) £58,767.

On capital expenditure up to your AIA, capital allowances will be available at 100%. Therefore, you will get tax relief at your highest rate (40% this year – possibly 50% next year) on the full capital expenditure up to your AIA.

On expenditure over this amount, for a one year period from 6^th April 2009, you will get capital allowances of 40%, so long as the expenditure is incurred between 6^th April 2009 and 5^th April 2010. So, if your year end is 5^th April 2010, and you spend £70,000 on equipment, you would get capital allowances of:

£50,000 @ 100% = £50,000

£20,000 @ 40% = £8,000

£70,000 £58,000

Of the £20,000, you only got a 40% first year allowance, so there is a balance of £12,000 (60%) which is carried forward to future years when each year it will get capital allowances at the writing down allowance (WDA) of 20% on a reducing balance basis. So, in year two, it will get £2,400 (20% of £12,000 leaving the balance of 80% for next year). In year three it will get £1,920 (20% of £9,600 leaving the balance of £7,680 for next year) and so on.

Of course, if you are planning to spend a lot, it makes sense to time this such that you make full use of your AIA. Ensure that you understand what the amount relevant for you is and sit down with your accountant to plan this in the most efficient way.

So, now you’ve decided what to buy and when – there’s one small problem. You haven’t sufficient funds. What are your options and what are the tax consequences of each?

Hire/Lease Purchase – this is where you pay instalments for the equipment – usually monthly. The equipment becomes yours at the date you sign the agreement, so essentially from the outset. This means that you will get capital allowances as discussed earlier. In addition, you will get tax relief on the proportion of the repayments that relate to interest at your highest rate. Therefore, this is similar to the treatment that would apply if you took a business loan out.

Loan – the tax treatment is as above. If you find yourself having to choose between a loan and a hire/lease purchase arrangement – compare APRs (annual percentage rate) and go for the lowest. The APR is better than comparing interest rates as the APR will take all charges into account.

If you have a mortgage (even if it is a residential one) you can sometimes extend this at a very favourable rate, or even re-mortgage. Your accountant will then work out a suitable proportion of the interest on which you can get tax relief.

Leasing – In this case, you never own the equipment – you are renting it. This means that you do not get any capital allowances on the equipment as it is not yours. Instead you will get tax relief on the full lease rental payments you make. You will need to check whether you or the company leasing it to you is responsible for maintenance/repairs etc. Sometimes, after the main contract period is over, you can continue paying the company a small rental (also known as a peppercorn rental) which means you can then continue keeping the equipment in exchange for this nominal rental. Even so, legally it does not belong to you. If you sell your practice, there is a problem in relation to leased assets, which your solicitor will no doubt advise you on.

Mac Kotecha (FCA) is a Chartered Accountant and Chartered financial planner who deals exclusively with dentists and has been established for over 27 years. His company offers Accountancy, Taxation & Payroll services in addition to invaluable advice on practice management, buying/setting up a practice and other dental issues.

Contact him on 020 8346 0391 or go to www.specialistdentalaccountants.co.uk to learn more.