ACCA ATX ^UK Syllabus B. Financial Decisions made by a business - Debt or equity? - Notes ^{1 / 1}

Raising Capital

If a company needs to raise capital to buy plant and machinery, increase working capital or buy an investment property it has two choices: it can either finance using debt or equity.

The examiner is going to use international accounting standard terminology, which means that previous terminology would refer to debt as debentures or corporate bonds but under the international accounting standard terminology the examiner will refer to debt as loan notes.

Debt

This is the company issues loan notes.

The company must pay interest on the loan notes.

Tax implications

1. The cost of issuing the loan notes such as legal costs and advertising costs are an allowable expense.

2. The interest payable on the loan notes is also an allowable expense.

3. These costs will reduce taxable trading profits if the loan is for trading purposes.

4. These costs will reduce interest receivable if the loan is for non- trading.

Equity

This means that the company is issuing shares. 

The company will make a distribution (pays a dividend to the shareholders).

Tax implications

• The cost of issuing the shares is a disallowable expense.

• The dividend paid to shareholders is also a disallowable expense (no effect on the tax paid by the company).

Other ways of raising finance

• Lease

  If an asset is leased, then a premium will be paid and rentals each year will be paid.

  The income element of the lease/no. of years of the lease, and the rentals are allowable expenses.

• Hire purchase

  If an asset is hire purchased, the amount paid is an allowable expense, except if a car that has emissions of >=50g is hire purchased, then 15% will be disallowable.

• Purchase outright

  If an asset is purchased outright, then it will receive capital allowances.