Ways to finance your office fit out

I’m considering an office fit out. What are the options to pay for it?

Generally, businesses will pick one of three options:

  • Paying out of capital funds, which affects cash flow and is becoming increasingly rare given current economic instability
  • Borrowing from a bank
  • Leasing the fit out, which is fast becoming a more attractive option

What are the benefits of each finance option?

Paying cash

  • All assets belong to the company from the outset
  • Annual investment allowance (AIA) can be claimed to the value of £200,000 per financial year
  • No ongoing payments to budget for

Bank loan

  • You can plan repayments over the term (usually between 1 and 10 years)
  • Can be tied in with the lifetime of the equipment or other assets you are purchasing with the loan
  • No requirement to give the lender a percentage of your profits

Leasing

  • Monthly payments can be planned as part of expenditure, along with rent
  • Can cover all costs, including design and build, and furniture, fittings and equipment
  • Fixed payments are easy to budget for
  • No-deposit option means cash flow is protected
  • Preserves company’s borrowing power
  • Tax allowable payments – can be offset against profits

What are the disadvantages of each?

Paying cash

  • Can leave cash flow vulnerable by tying up capital in assets that tend to depreciate quickly
  • Can limit the budget and therefore restrict the scope or quality of the fit out
  • Annual investment allowance does not allow you to offset payments against taxable profit

Bank loan

  • Not very flexible – you may be charged for repaying early, for instance
  • You may struggle to meet monthly payments if cash flow becomes a problem
  • Risky if the loan is secured against your personal property or assets
  • Repayments are subject to fluctuations in Bank of England interest rates, making it harder to plan your finances

Leasing

  • You may struggle to meet monthly payments if cash flow becomes a problem
  • Depending on the type of lease, you may not own the assets at the end of the contract
  • Final payments can be significant if you decide to keep the assets
  • The length of the lease or purchase needs to be weighed up against the quality and durability of the products/assets

What are the different types of leasing?

  • Lease purchase
  • Finance lease
  • Contract hire 

Also known as hire purchase, payments are made over a fixed period, and at the end the asset becomes yours. VAT-registered businesses can claim back the VAT on the asset up-front, there is a capital allowance on the reducing balance and interest payments can be offset against profit as part of a 100 per cent tax allowance over the term of the contract.

Similar to lease purchase, except you do not own the asset at the end of the contract, although you may wish to buy the assets at some point. Payments can be offset against tax and VAT can be reclaimed.

Using an asset that remains the property of the finance company, which is also responsible for its maintenance and upgrade – can be a more affordable option to finance lease for this reason, and attractive because there is no big initial outlay.

If my company pays outright for the fit out, is it tax deductible?

Yes, but a limited amount. You can claim up to £200,000 per year annual investment allowance (see our FAQs on financial aspects of an office fit out). However, if you lease the project, the repayments are 100% tax allowable, which can mean it works out cheaper than paying cash.

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