Starting as a sole trader, need equipment - how are monthly payment plans taxed?

Asterism

Hi everyone.

I'm about to become a self-employed IT contractor. I will need to buy myself a laptop to work on (used entirely for business purposes). However, I cannot afford to pay for one up-front, and so would like get one via finance, paying for it in monthly installments. I expect the payments to last two years, meaning they will be spread over 3 tax years - and I will probably stop being self-employed before this point, which complicates things further.

I am not sure how this would be taxed. HMRC guidelines seem to suggest that computers would come under capital expenditure - is this true even if it is being paid for monthly? Should the cost of the computer be recorded up-front as the entire cost, or each monthly repayment recorded separately? Should the interest from the payment plan be recorded separately to the "real" cost? Is the interest itself tax-deductible? Would I be better off getting a bank loan and buying the computer outright, even if the interest rate is higher?

I am aware that precise answers to these questions probably require me to pay for an accountant, but I would very much appreciate a gist of what I should do. Broadly my concern is not to saving money, but I am very afraid of a nasty surprise when it comes to filling out my tax return for the year.

Pennywise

It will depend on the type of finance.

If you take immediate legal ownership, i.e. buy it via a bank loan or hire purchase, then you claim 100% capital allowances in the year of purchase, so all tax relief in year one and then nothing in later years.

If legal ownership stays with the finance firm, i.e. lease, then you claim the lease payments year by year, so tax relief will be spread over the 2/3 years of payments.

Payment plans called "lease purchase" agreements or similar wording, are more complicated as some will transfer legal ownership immediately and some will transfer it at the end. You'd need to read the terms of the agreement to work out which.