There are a number of reasons, mainly tax efficiency, to lease equipment rather than make an outright purchase. Travis Way, ACM's chief finance officer outlines some of the benefits.
- Freedom for your capital.
Leasing offers 100% financing, allowing you to put your valuable working capital to better use - like increasing your profits - instead of tying it up in a depreciating asset. - Low monthly repayments.
Leasing not only allows companies immediate access to the latest equipment, it also means that your monthly payment is fixed throughout the term - whatever happens to interest rates or inflation. Unlike many high street bank facilities or overdrafts that are subject to the change in market conditions, a lease facility with its protected payment allows for simple and effective future budgeting. - Excellent tax benefits.
Because finance lease rentals are 100% allowable against pre-tax profits, the total cost of your purchase, capital and interest can be offset during the lease period, with your payments deducted as a trading expense. In reality it means that the real cost of your lease is in fact dramatically lower than the payments you make.
In comparison, outright purchase ties up valuable capital, thereby crippling a company's development potential, while only offering reduced tax-deductible allowances.
With a simple calculation we will show you the comparison between a Finance Lease Hire Agreement and a cash purchase. With a Finance Lease Hire Agreement, tax relief is available on all rentals at the highest tax rate you pay. In contrast, a cash purchase will allow tax relief only on the capital allowances on the product(s).
ExampleThis is a model showing the difference in tax relief available.
- Invoice value: £5,000
- Lease period: 3 years
- Frequency: Quarterly
- Highest tax rate: 40%
These figures exclude VAT and assume the customer is a tax paying organization.
Option 1Lease rental
Tax relief is available on all rentals at the highest rate you pay.
Year |
Rentals payable |
Total |
Tax relief |
Net Payable |
| 1 | 4 Quarters at £511.50 | £2,046.00 | £818.40 | £1,227.60 |
| 2 | 4 Quarters at £511.50 | £2,046.00 | £818.40 | £1,227.60 |
| 3 | 4 Quarters at £511.50 | £2,046.00 | £818.40 | £1,227.60 |
| Total | £2,455.20 | £3,682.80 |
Total tax relief over 3 years period: £2,455.20
Option 2Cash purchase
Tax relief is only available on the capital allowances on the product(s).
Year |
Capital allowance |
Total |
Tax relief |
Net Payable |
Initial Purchase |
- | £5,000.00 | ||
| 1 | 40% of £5,000.00 | £2,000.00 | £800.00 | |
| 2 | 25% of £3,000.00 | £750.00 | £300.00 | |
| 3 | 25% of £2,250.00 | £562.50 | £225.00 | |
| Total | £1,325.00 | £3,675.00 |
Total tax relief over 3 years period: £1,325.00
The difference| Breakdown | Lease rental | Cash purchase |
Total payments |
£6,138.00 | £5,000.00 |
Less tax relief |
£2,455.20 | £1,325.00 |
Net Payable |
£3,682.80 | £3,675.00 |
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