Paying for IT

Pro

You don’t have to be flush with cash reserves to get your hands on the latest equipment. Whether it’s that top-of-the-range Pentium 4 PC the accounts department has been begging for, or that state-of-the-art photocopier your office manager has been dropping hints about, there are a number of options open to you as an owner-manager of a small business. While your accountant can provide you with advice tailored to the particular circumstances of your company, the following might give you some food for thought.

One thing that is certain: If you purchase IT equipment, it will be treated as an asset. You cannot offset the entire cost of purchase as an expense against income in the same tax year. Instead, you write off the amount of value the asset loses each year or its depreciation. For IT equipment, the Revenue Commissioners allow assets to be written off over a five year period or 20 per cent of the original purchase cost per year.

Given the nature of the PC industry this is quite long; other European countries allow write off periods as short as three years.

Opt for hire

An alternative option to outright purchase is hire purchase, where you borrow a proportion of the cost of purchase and repay over a fixed period. This has a number of advantages. For a start, you aren’t dipping into your own cash reserves—except for any down-payment—and you are spreading the cost of purchase over several months or years.

However, while there is a monthly outgoing related to the purchase—the repayments—you are in the same position tax wise as someone who has made an outright purchase. You can only deduct 20 per cent of the original capital cost against earnings each year. However, you may be able to deduct the interest portion of the repayment.

Live to lease

Another option is to lease the equipment. This has several advantages. For a start, because you are not making a capital investment, the lease payments are treated as an operational expense so they can be deducted completely against earnings. While this is certainly easier to administer from a tax point of view, bear in mind that you may end up paying more for the purchase than you would have if you had gone for hire purchase.

Another drawback of leasing is that at the end of the lease period, say two years, the disposal of the asset can have tax implications. Depending on the terms of the lease you may receive ownership of the asset without any further payment. From the Revenue point of view, however, this asset may still retain value and you may be taxed on this value.

Also, don’t forget the VAT implications. If you buy on hire purchase, and if you are registered for VAT, you can claim the entire VAT amount back in one go. However, if you lease, you reclaim the VAT over the leasing period (see panel).

What next?

Once you’ve decided on which option to go for, the next step is to contact a leasing company. Your bank may have an arrangement with such an entity so your first port of call should be your bank manager. However, don’t forget that many technology vendors offer their own leasing or finance deals.

Compaq (Compaq is now part of the new HP) for instance, is currently offering a zero cost lease. According to Carita O’Leary, finance sales manager with Compaq this scheme is a pure operational lease more akin to spot renting a car. At the end of the leasing period the item reverts back to Compaq. The advantage of this, says O’Leary, is that at the end of the leasing period the customer is not burdened with the cost of disposal or with realising any residual value. “In two years time the customer might be looking to replace the desktop PC they have bought,” explains O’Leary. “However, while the desktop might be worth something to Compaq, the customer cannot realise the value so easily. So we give the customer the option of simply paying for usage. We expect it to be worth something at the end of the rental period so we build that into the rental. Over, say two years, the rental does not exceed the total cash value, and that’s where zero-percent finance comes in.”

While this scheme is aimed at the enterprise market, firms at the high end of the SME definition (less than 100 employees) may qualify. “We would look at every case individually,” says O’Leary. “But the general conditions we would set is that the company has at least one year of audited accounts (no start-ups) and has an average IT spend of €100,000 per year.”

This article was written with the assistance of Garret Wren, Chartered Accountant.  For information on Compaq’s finance options, call 1850 360 360 (internal/Ireland only).