Purchasing equipment but not sure whether to buy, lease or hire?

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At some point every business owner needs to think about purchasing equipment. There are three common options: buying outright, leasing, or renting.

So what is the best option for you?

It depends on how much cash your business has at the moment and how this equipment would be used in the long run.

We’ve reviewed these options and come up with a list of key points so that you can make the right decision depending on your situation.

Buying Equipment Outright

Buying equipment has several advantages from a tax point of view but it comes at a cost. It is the most appropriate option when equipment is expected to have a long and useful life like office furniture or production machinery.

Benefits

  •       Equipment will be included in a capital allowance so you can write off its cost against the taxable income of your business.
  •       If you finance your equipment with a loan, then your finance charge is allowed against tax. You can claim VAT on most equipment, excluding cars.

Points to consider

  •       It requires a high up-front payment. There is a risk of cash shortage in the short run, especially if your business is relatively new.
  •       The value of your equipment will depreciate over time. You cannot claim tax on depreciation.

Hire Purchase of Equipment

Hire purchase is a type of borrowing where you do not own goods until you pay in full.

This is a great option if you cannot raise cash.

It is more expensive as there is interest and a fee to be paid to complete the purchase.

Hire purchasing is usually common in construction and manufacturing to finance expensive machinery.

You can find more information on the Citizens Advice Bureau website.

Benefits

  •       Your equipment is treated as an asset.
  •       It has a lower initial cost as there is no full payment up-front.
  •       If you finance your equipment with a loan, then a finance charge is allowed against tax.
  •       Your equipment will be included in a capital allowance so you can write off its cost against the taxable income of your business.
  •       You can claim VAT on most equipment, excluding cars.

Points to consider

  •       There is interest on the outstanding amount.
  •       The value of your equipment will depreciate over time. You cannot claim tax on depreciation.
  •       Payment installments will be shown in the balance sheet as a liability and interest payments are shown as expense in P&L.
  •       You are not allowed to sell or dispose of equipment without your lender’s permission.

Finance Lease of Equipment

A finance lease is different from hire purchase as it does not provide legal ownership of equipment.

You use the equipment for all / almost all (100-90%) of its useful life, but the finance company owns it.

In the initial fixed period it is arranged at a full cost, and then there is a secondary period at a low cost.

Finance leases can be arranged for vehicles, construction equipment, plant and machinery.

The HMRC website explains more about this lease.

Benefits

  •       Leased equipment is treated as an asset and its payments are recorded as a liability.
  •       You have a right to sell equipment to a third party at the end of the initial period and receive profit.
  •       Depreciation is allowed.
  •       If it is a car lease, you can recover 50% of VAT.

Points to consider

  •      There is no legal ownership of equipment, but for accounting purposes your company has all the risks and rewards of the ownership.
  •      You will be responsible for maintenance and insurance of equipment.
  •      Capital allowance is not possible.
  •      VAT is payable on the initial payment and all subsequent installments.

Operating Lease of Equipment

In contrast to the above options, an operating lease never implies ownership rights as it is just renting equipment.

This lease is cheaper and common for equipment that has a long economic life such as cars, office equipment, and machinery, and can be re-sold in the second hand market.

You can read more about operating leases on Wikipedia.

Benefits

  •     It comes with a maintenance contract.
  •     The lease period is 2-3 years so equipment is usually new.
  •     If you are renting a car, it is possible to claim 50% of VAT.
  •     Maintenance VAT is fully refundable.

Points to consider

  •      Equipment is not listed as an asset on the balance sheet.
  •      Rental payments are shown in P&L as operating expenses.
  •      There is no capital allowance.
  •      VAT is charged on each rental installment.

We hope you find this information useful in exploring possible options when acquiring new equipment for your business.

If you would like to discuss these options in greater detail and how they can affect your business performance and accounts, get in touch with us and our advisers will help you to find the right solution.

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