Leasing
What is it suitable for?
Leasing can be a good option for funding short life assets which need regularly upgrading e.g., computer systems and software. Alternatively, it is used to finance equipment over a period less than its full working life and which has an established second-hand user market e.g., passenger cars, commercial vehicles and construction equipment.
What does it involve?
Fundamentally, an equipment lease is a usage agreement between an equipment owner (the lessor) and you, the user of the equipment (the lessee). With a leasing agreement you pay a pre-agreed rental over a set period. You will never own the asset. However, you have full use of it during the primary rental term.
How does it work?
Lease agreements are arranged through independent leasing companies (typically bank based subsidiaries often referred to as third party lessors), captive leasing companies (owned by a manufacturer) and financial intermediaries (providing one or more services). The lessor will acquire the asset on your behalf and rent it to you for use in your business. There are three types of rental facilities:
- Finance Leasing
- Operating leasing
- Contract hire
Are there any tax advantages?
The leasing company claims the capital allowances and will take this into account when calculating your rental charges. Generally the full cost of contract hire can be treated as a revenue expense and rentals are fully allowable against taxable profit. This is a factor in determining whether you should lease rather than buy.
You can re-claim the VAT on lease and contract hire rental repayments. Special rules apply to business vehicles, where the amount you can reclaim is generally 50%.
Bank borrowing
What is it suitable for?
Any form of business asset, including land and property.
What does it involve?
You will make regular payments on a loan or cover the cost through normal cashflow if it is paid for from a current account. You will own the asset in full from day one.
How does it work?
The cost of the asset is spread over an agreed term. The repayment schedule will depend on the amount of money borrowed, loan duration and the rate of interest. You may be asked to make some contribution towards the purchase price.
Are there any tax advantages?
From the commencement of the agreement, your business is treated as the owner of the equipment, which means you can claim capital allowances. The interest element is 100% tax allowable.
Disadvantages
The disadvantages of bank borrowing are; the bank is likely to want additional security from the company or directors in support of the advance. Specific covenants may also be requested e.g. appropriate debt to equity ratios. In addition bank facilities are often repayable on demand.
Capital allowances
Encouraging investment in your business
You can claim capital allowances on expenditure on plant and machinery (P&M), which includes vans, cars, machines, computers, furniture, and many other items you might use in your business.
You cannot claim for things you buy or sell as your trade - these are claimed as business expenses. If you buy on hire purchase, you can claim a capital allowance on the original cost of the item but the interest and other charges count as business expenses.
Most businesses have an Annual Investment Allowance (AIA) of £50,000 for P&M purchased between the beginning of the 2008-09 tax year and the end of the 2009-10 tax year. This allows them to write off 100 per cent of the cost of the qualifying plant and machinery, up to a value of £50,000, against their taxable profits in a standard accounting period.
For P&M bought from 1 April 2010 for the purposes of Corporation Tax and from 6 April 2010 for the purposes of income tax, most businesses are entitled to an AIA of £100,000. Transitional rules have been put in place for businesses whose accounting periods span the operative date of the increase.
You can download information on the transitional rules from the HM Revenue & Customs (HMRC) website (PDF, 59K) - www.hmrc.gov.uk/budget2010/bn04.pdf
On expenditure over this amount, the standard rate of capital allowance is 20 per cent, although there are other rates depending on the type of expenditure. There is a special rate pool containing expenditure on integral features, long life assets and thermal insulation. The annual rate of allowance for it is 10 per cent. In a few cases 100% allowances are available on specific types of efficient equipment in the year you make the purchase; for example, energy saving machinery and low emission vehicles. Note that ‘a year’ refers to a tax year, not a calendar year.
Hire Purchase
What is it suitable for?
Tangible business assets that have a medium to long life.
What does it involve?
You will make regular periodic payments over a fixed duration and eventually take ownership of the asset in full.
How does it work?
Hire purchase enables you to eventually secure ownership of the new asset. The cost of the asset is spread over an agreed term. Payments will be linked to the useful working life of the asset and can be customised to suit particular business needs e.g. seasonal payments. Most deals are structured with an initial deposit, followed by periodic payments. The finance company will retain title to the asset until it is paid for in full. Hire purchase is a committed facility and not repayable upon demand.
Are there any tax advantages?
From the commencement of the agreement your business is treated as the owner of the equipment, which means you can claim the writing down allowances. The interest element of the repayment can be deducted from taxable profits as a trading expense.
Purchasing outright
What is it suitable for?
Any type of business asset.
What does it involve?
You purchase using cash and take ownership of the asset immediately.
Are there any tax advantages?
On the basis your company owns the asset, you can claim capital allowances.
Disadvantages
The disadvantages of cash purchase are; you tie up valuable cash resource, you own an asset that more than likely will depreciate over time, you will need to maintain and insure it while you use it and dispose of it at the end of its useful working life.
Many companies feel that paying cash outright for capital assets places a significant drain on their company’s working capital. It makes sense to ease your cash flow through regular payments over an agreed period of time.
Finance Options
This will depend on your circumstances, which is why it’s important to work with a finance professional that has the expertise to offer you advice on the following:
- Your overall attitude to owning assets outright, instead of leasing them
- How this affects your cashflow and working capital requirements
- Available tax allowances
- VAT implications
Follow the links (left) to view the options.